The Kelso State Bank, of the state of Washington, closed its doors on March 17, 1921. At that time the county treasurer of Cowlitz county, Wash., was credited on the books of the bank with funds of the county aggregating $64,460.96, which were secured by the bonds of the appellants. Thereafter the appellants paid the county treasurer the amount so credited to him and took assignments of the claims of the treasurer and of the county against the bank. The last two deposits of the county funds were made on March 9 and March 14, 1921. They were general deposits, not special. The deposit of March 9 was $6,752.55. The deposit of March 14 was $35,337.57, and it included a draft on Pope & Talbot, of San Francisco, for $32,897.97, payable to the county treasurer for taxes due the county. The cashier of the bank took the Pope & Talbot draft and $6,500 cash to the United States National Bank of Portland, and- deposited the same, making, with the credit which it already had, a total deposit of $55,370.61, against which was charged $33,491.59, the amount of a loan which the Kelso bank had obtained from the Portland' bank, and which had been secured by the pledge of certain warrants belonging to the Kelso bank. The appellants in their complaint alleged that at the time when the deposits of March 9 and March 14 were made the Kelso State Bank was hopelessly insolvent, that its hopeless insolvency was known by the officers of the bank, and that the title to the county funds so deposited did not pass to the bank, but remained in the county. They further alleged that with such deposits the bank purchased warrants amounting to $33,-491.59, which became the property of Cowlitz county. Upon the pléadings and the evidence the court below found for the appellees and dismissed the appellants’ bill.
The burden of proof was upon the appellants to show that real fraud was practiced upon the depositor to whose rights they became subrogated., To do this they were required to show affirmatively both that the bank was actually insolvent when it received the deposits and that its managing officers then knew this to be the fact. Furber v. Dane, 204 Mass. 412, 90 N. E. 859, 27 L. R. A. (N. S.) 808; St. Louis Railway Co. v. Johnston, 133 U. S. 566, 10 Sup. Ct. 390, 33 L. Ed. 683. In the leading case of Quin v. Earle (C. C.) 95 Fed. 728, Judge Gray said:
“If the president and officers of the bank knew or believed that the bank was hopelessly and irretrievably insolvent at the time of receiving the deposit of the complainant, then a fraud was undoubtedly committed by the bank upon the complainant, for which there should be a remedy. But fraud must be proved, and is not to be presumed, and the burden of proof is on the complainant. The mere fact that the bank was in an embarrassed condition, by reason of the large indebtedness to it from its president, is not sufficient of itself to establish the fraud alleged in this case.”
A similar ruling was made in Brennan v. Tilinghast, 201 Fed. 609, 120 C. C. A. 37. In Williams v. Van Norden Trust Co., 104 App. Div. 251, 93 N. Y. Supp. 821, the court said:
*830“The mere fact of insolvency at the time the deposit was received is not sufficient to justify a finding of fraud, but the insolvency must be of such a character that it was manifestly impossible for the hankers to continue in business and meet their obligations, and that fact must have been known to the bankers, so as to justify the conclusion that the bankers accepted the depositor’s money knowing that they would not and could not respond when the depositor demanded it. It,is fraud that must be proved. An honest mistake as to the condition of the bank and an honest belief in the solvency of the institution, if it exists, negative the conclusion of the fraud upon which the plaintiff’s cause of action must depend.”
The court further said:
“The court was certainly not justified in refusing to believe the witness, and without further evidence, finding the exact contrary from his testimony, because of the fact that he was a party to the action, and therefore an interested witness.”
In New York Breweries Co. v. Higgins, 79 Hun, 250, 29 N. Y. Supp. 416, Judge Parker held that a deposit made in the usual course of business vests in the bank, and cannot be recovered by the depositor on the ground of fraud, though the bank was insolvent and failed on the next day, and though the deposit was made in reliance on representations of the president that the bank was all right, unless the officers of the bank knew of its insolvency at the time of the deposit.
The appellants cite State v. Welty, 65 Wash. 244, 118 Pac. 9, but the principle which controlled decision in that case has ño application to-the case at bar. That was a criminal proceeding under a statute which made it a felony to receive a deposit in a bank when the bank officer knows or has good reason to believe that the bank is insolvent. Knowledge of insolvency was by the statute^ imputed to the officer, if by the exercise of “reasonable care and diligence” he could have discovered it. There is no imputation- of knowledge of insolvency in aid of the recovery of deposits received by an insolvent bank. In such case, in order to charge the bank as a trustee ex maleficio, its officers must have had actual knowledge of its hopeless insolvency, and it is not enough if by the exercise of reasonable care and diligence they could have discovered it.
The court below, on the testimony heard in open court, found that, while the bank was in fact insolvent when it received the deposits in question, in that it did not possess sufficient solvent and marketable assets to meet its obligations, it was still a going concern and continued to receive deposits, pay checks, and to do general banking business for three days thereafter, until forced to close by order of the banking department. And said the court:
“So far as I can ascertain from the evidence, the officers of the bank did not know or believe at that time that the bank was hopelessly and irretrievably insolvent, but thought it would be able to continue in business.”
The evidence amply sustains that conclusion. Not only_ so, but there is no evidence to the contrary. The finding of the trial court rests not so much upon the testimony of the defendants as upon the testimony of the appellant’s witnesses. One of the witnesses called for the appellants was the assistant cashier of the bank. He -testified *831•that about March 13, 1921, he and his brother and the president of the bank made an examination of the assets of the bank, in view of a possible purchase of the bank by the witness and his brother; that they found about $100,000 of paper that was questionable, but that Stewart, the cashier, strenuously maintained that a large part of the paper which the others thought was worthless would in his opinion eventually be paid. Said the witness: “It was largely a matter, then, of a difference of opinion.” The witness testified that Stewart spoke optimistically of the condition of the bank, and said that “we would come out all right.” The witness added, “I honestly do think that he thought we would at that time.” The bank commissioner of the state of Washington, a witness for the appellants, testified:
That he did not conclude that the bank ought to be closed until after he had had a conversation with one of the stockholders on March 16, 1921. “Up until that time, with all that I knew about the bank, I did not feel that there was sufficient justification to close it; and none of the officers (of the bank) felt that way; they all believed that it would work out. Until the very last, I think they were confident that it would work out.”
The deputy supervisor of banking corroborated the other witnesses called by the appellant, in that the embarrassment of the bank arose from the large number of doubtful loans it had made. He testified that Stewart represented that the assets were all right. Said the witness :
“I felt that his contention regarding the assets might be genuine in his own mind; but I could not feel that his value of the assets was correct. * * * Mr. Stewart was very insistent that he would be able to collect on these papers. His. statements were that always he felt that he could work those papers out. I believe he was sincere in his belief.”
Again, there was failure to trace the deposits of the county treasurer into the warrants which the Kelso Bank left with the United States National Bank. The court below found the evidence to be clear that the purpose of the Kelso Bank in leaving the warrants with the United States Bank was that it might thereby be enabled to obtain future deposits of county funds, and that the warrants were not purchased by the Kelso Bank from the United States Bank, and that they never did belong to the latter bank. The evidence fully sustains this view of the transaction between the two banks. The warrants had been the property of the Kelso Bank several months before its suspension. That bank had deposited them with the United States Bank in September and December, 1920, only as collateral security for loans made by the latter bank to the former.
The appellants point to the fact that, when the warrants were so deposited with the National Bank, the Kelso Bank executed instruments which recited a sale of the warrants to the former bank, together with the promise of the Kelso Bank to repurchase the warrants at par on or before 90 days after date. These instruments were merely a device to evidence the actual transaction between the parties, and they did not in any way affect or alter the understanding between them. The National Bank carried the transactions upon its books as loans and collected no interest on the warrants, but charged interest on the loans which was paid by the Kelso Bank. *832The appellees in their answer to the bill of complaint alleged • that Stewart, the cashier, was intrusted with the general management of the affairs of the bank, and that he juggled the accounts and misused and appropriated the funds, and mismanaged the assets of the bank, and loaned its funds to irresponsible persons, and by reason thereof the bank became unsound. It does not follow from this that Stewart believed the bank to be insolvent at the time when the deposits in question were made, nor was his knowledge of his own mismanagement imputable to the officers of the bank. Directly in point is the decision of Vice Chancellor Pitney in Perth Amboy Gaslight Co. v. Middlesex County Bank, 60 N. J. Eq. 84, 45 Atl. 704, holding that the fact that a cashier of a bank who had abstracted funds there1 from knew the bank was insolvent was not notice of such insolvency to the other officers. Said the Vice Chancellor:
“0£ course, it almost goes without saying that the fact that the cashier knew for months that the bank was insolvent is not notice to the other officers of the bank. It might as well be argued that an owner of a chattel which has been stealthily stolen from him by his employé is chargeable with notice of such theft, and estopped from asserting his title to the stolen chattel when found. The authorities are all against the appellants in this respect. It is not necessary to cite them.”
So in Terhune v. Bank of Bergen Co., 34 N. J. Eq. 367, the directors of a bank discovered that their cashier had embezzled the funds, but not to such an extent, as they then supposed, as to render the bank insolvent. The following day the bank received a deposit. On the next succeeding day the bank suspended through insolvency. It was held that the depositor was not entitled to preference in payment, there being evidence that at the time when the deposit was made the directors thought the bank was solvent.
Th'e foregoing view of the merits of the case renders it unnecessary to discuss the defense, pleaded and relied upon by the appellees, that on April 25, 1921, the appellants had each presented its claim to the liquidating officer of the bank, which claims were approved, and that thereafter the appellants had received dividends’ on their claims, whereby they were estopped to assert a preference.
The decree is affirmed.