Blumberg v. Taggart , 213 Minn. 39 ( 1942 )

The undeniable and indisputable fact is that solely through the acts of its agent defendant received funds which he held charged with a constructive trust for the benefit of plaintiff. Because of that fact, I think that the instant case is not controlled by the rules announced by the majority, but by a well settled exception to such rules which compels decision in favor of plaintiff.

The rule, which I think is applicable here, is well settled by at least 17 of our decisions, of which the majority takes no notice, and by the overwhelming weight of authority. It is that a principal is chargeable with knowledge of facts known to his agent, who is his sole representative in the transaction, even though the agent is himself interested and guilty of wrongdoing.

In State Bank v. Adams, 142 Minn. 63, 170 N.W. 925, 927, the question was whether plaintiff was charged with notice that the note there sued on was fraudulent in its inception. Its president, who was its sole agent in the transaction for the acquisition of the note, had knowledge of facts charging him with notice of the fraud. As a stockholder and a member of the advisory committee of the corporation which transferred the note, he acquired knowledge of such facts. The transferor authorized plaintiff's president, if plaintiff purchased the note, to deduct $750 for his stock of the transferor corporation amounting to $500 face value. Plaintiff's president testified that in the acquisition of the note for plaintiff he "was acting 2,300 dollars worth for the bank and 750 dollars worth for" himself. The bank claimed, as here, that it was not chargeable with notice because the agent was engaged in an independent fraud in which he was personally interested. We said:

"A bank is chargeable with knowledge of facts known to an officer transacting its business and pertaining to matters within the scope of its business. This doctrine is based on the ground that it is the duty of the officer to communicate his knowledge to the bank, and it is to be presumed that he has performed this duty. * * * The rule of imputed notice does not apply, where the officer whose knowledge is sought to be imputed to the corporation is himself interested, and does not act for the corporation, but is connected with the transaction only in an adversary capacity, * * * for in such case it is to his own advantage not to impart his knowledge to the bank, and it is not to be presumed that he does so. But there is no roomfor the application of this exception, where the officerinterested is the sole representative of the bank in thetransaction. In such case his knowledge is the knowledge of thebank. * * * We hold that notice to Orth was notice to plaintiff bank." (Italics supplied.)

Many of the leading cases are cited to support the rule there announced.

In Darelius v. Commonwealth Mtg. Co. 152 Minn. 128, 134,188 N.W. 208, 210, defendant was charged with the knowledge of fraud of its controlling stockholder at whose instance a note was transferred to it for his personal benefit. There, we said:

"Schafer of course had full knowledge of the facts, and, though personally interested, to the extent that he was the sole representative of the corporation, his knowledge was the knowledge of the corporation."

In Farmers Merchants State Bank v. Kohler, 159 Minn. 35,40, 198 N.W. 413, 415, the plaintiff bank was charged with knowledge of fraud of its officers who made fraudulent representations in the sale of a farm. We said:

"Although the De Walls were interested in the matter personally and were seeking to benefit themselves, yet they were the sole representatives of the bank in this transaction and under such circumstances their knowledge of the fraud was the knowledge of the bank." (Italics supplied.)

In Central Met. Bank v. Chippewa County State Bank, 160 Minn. 129,199 N.W. 901, the defendant bank was charged with knowledge of its president which he gained as an officer and stockholder of a corporation whose paper the bank carried. The rule stated has been applied and followed in Citizens State Bank v. Wade, 165 Minn. 396, 206 N.W. 728; Union Central L. Ins. Co. v. Star Ins. Co. 178 Minn. 526, 227 N.W. 850; Solway State Bank v. School District, 179 Minn. 423, 229 N.W. 568; Anderson v. Iverson Outdoor Life, Inc. 187 Minn. 308,245 N.W. 365; Peoples State Bank v. Ruppert, 189 Minn. 348,249 N.W. 325; City of Minneapolis v. First Nat. B. T. Co. 198 Minn. 280,269 N.W. 521, 107 A.L.R. 1203; Penn Anthracite Min. Co. v. Clarkson Sec. Co. 205 Minn. 517, 287 N.W. 15. The rule was recognized in First Nat. Bank v. Carey, 153 Minn. 246,190 N.W. 182; Matelski v. Farrell, 159 Minn. 466, 199 N.W. 227; Harwood State Bank v. Hendrum Co-op. Elev. Co. 166 Minn. 400, 208 N.W. 24; Solway State Bank v. School District, 170 Minn. 83, 212 N.W. 25; Moorhead Inv. Co. v. Carlson, 177 Minn. 174, 224 N.W. 842; In re Trusteeship Under Will of Rosenfeldt, 185 Minn. 425,241 N.W. 573; Lake Park Development Co. v. Steenberg Const. Co.201 Minn. 396, 276 N.W. 651.

The weight of authority supports the rule. Curtis, Collins Holbrook v. United States, 262 U.S. 215, 43 S.Ct. 570,67 L.ed. 956; Connecticut F. Ins. Co. v. Commercial Nat. Bank (5 Cir.) 87 P.2d 968; Maryland Cas. Co. v. Queenan (10 Cir.)89 F.2d 155; Pensacola State Bank v. Thornberry (6 Cir.) 226 F. 611; Tatum v. Commercial B. T. Co. 193 Ala. 120, 69 So. 508, L.R.A. 1916C, 767; First Nat. Bank v. Reed, 198 Cal. 252,244 P. 368; First Nat. Bank v. Town of New Milford, 36 Conn. 93; Morris v. Georgia L. S. B. Co. 109 Ga. 12, 34 S.E. 378,46 L.R.A. 506; First Nat. Bank v. Dunbar, 118 Ill. 625,9 N.E. 186; Atlantic Cotton Mills v. Indian Orchard Mills,147 Mass. 268, 17 N.E. 496, 9 A.S.R. 698; Tremont Trust Co. v. Noyes,246 Mass. 197, 141 N.E. 93; First Nat. Bank v. Babbidge,160 Mass. 563, 36 N.E. 462; National Turners B. L. Assn. v. Schreitmueller, 288 Mich. 580, 285 N.W. 497; Brownell v. Ruwe,117 Neb. 407, 220 N.W. 588; Holden v. New York and Erie Bank,72 N.Y. 286; National Bank v. Waynesboro Knitting Co. 314 Pa. 365,172 A. 131; Mays v. First State Bank (Tex.Com.App.)247 S.W. 845; State Bank v. Payne, 156 Va. 837, 159 S.E. 163; Knobley Mountain Orchard Co. v. People's Bank, 99 W. Va. 438,129 S.E. 474, 48 A.L.R. 459; Higgins v. Daniel, 5 Wn.2d 134,105 P.2d 24.

In 2 Am. Jur., Agency, § 380 the rule is thus stated:

"A qualification of the rule that the knowledge of an agent engaged in an independent fraudulent act on his own account is not the knowledge of the principal has also been made where the agent, though engaged in perpetrating an independent fraudulent act on his own account, is the sole representative of the principal. It is held under such circumstances that the agent's knowledge is imputable to his principal, and that the case falls within the general rule imputing the agent's knowledge to the principal. This qualification to the exception has been applied in cases involving agents and officers of corporations as well as in cases involving agents and other principals."

The question is most extensively discussed in Munroe v. Harriman National B. T. Co. (2 Cir.) 85 F.2d 493, 111 A.L.R. 657, and annotation, which support the rule that the principal is charged with notice under the circumstances of this case. The annotation says (111 A.L.R. 665):

"While, as subsequently pointed out, there is some difference of opinion, or at least of statement, as to its true rationale or foundation, the great weight of authority supports the sole actor or sole representative doctrine, by virtue of which a corporation whose sole representative in a transaction as the adversely interested officer or agent is, at least if it asserts or stands upon the transaction either affirmatively or defensively, deprived of the benefit of the exception previously noted, in case of an officer or agent acting adversely, to the general rule of imputed notice."

To this weight of authority that of the Restatement, Agency, should be added. In § 274, comment d, the rule is thus stated:

"d. Deposits to principal's account. The rule stated in this Section applies where the agent, being authorized to deposit money to the principal's account, deposits money fraudulently obtained. In this case the principal holds the claim for money so deposited subject to the rights of the defrauded person and this is so even though the money was deposited to replace money which the agent had embezzled from the principal's account."

The case of Atlantic Cotton Mills v. Indian Orchard Mills,supra, is a leading one and illustrates the application of the rule. There one Gray, who was the treasurer of two corporations, stole money from one to make up funds which he had stolen from the other, which he placed in the funds of the latter without the knowledge of any of the officers of either company or the intervention of any other agent. The Massachusetts court held that the corporation from which the money was stolen was entitled to recover the amount thereof from the one which received the same. The court said (147 Mass. 274, 17 N.E. 501, 9 A.S.R. 698):

"There was no transaction whatever between Gray and the plaintiff, in respect to the transfer of this money, in which the plaintiff was represented either in whole or in part by any other person than by Gray; and therefore, even though the transfer to the plaintiff has been made in bank bills or in gold coin, (which it was not,) the plaintiff must be deemed to have had knowledge of the true ownership, because in receiving the funds it acted solely through Gray's agency. It must be deemed to have known what he knew; and it cannot retain the benefit of his act, without accepting the consequences of his knowledge. The plaintiff cannot obtain greater rights from his act than if it did the thing itself, knowing what he knew."

The rule has been followed in numerous cases holding that, where an officer of a bank fraudulently appropriates funds of a third person and uses them in settling his own liabilities to the bank, the bank is liable to the party defrauded. In Knobley Mountain Orchard Co. v. People's Bank, 99 W. Va. 438,129 S.E. 474, 48 A.L.R. 459, supra, the cashier of the bank was the treasurer of plaintiff. He drew checks as plaintiff's treasurer which he used to pay overdrafts on defendant by himself and his brother. He was the sole officer or agent of defendant who had any knowledge that he stole money from plaintiff which he received as defendant's officer and agent. The court held that defendant was charged with its cashier's knowledge because he was its sole agent acting for and in its interest in the transactions. The cases are collected in the annotation at 48 A.L.R. 465, which points out that the weight of authority supports the rule.

I think that the majority has failed to distinguish the case of Curtis, Collins Holbrook Co. v. United States and that of Atlantic Cotton Mills v. Indian Orchard Mills, except upon immaterial and relevant grounds. In Munroe v. Harriman National B. T. Co. supra, the court said (85 F. [2d] 495):

"Thus, in Curtis, Collins Holbrook Co. v. United States,262 U.S. 215, 43 S.Ct. 570, 67 L. ed. 956, an agent employed to procure title to land, contrary to instructions procured it with knowledge of a fraud practiced on the owner. Although the agent had an interest adverse to his principal to conceal the defect in title because his own profits would increase with the number of titles procured, his knowledge was imputed to the principal. He was the sole actor for the corporate principal in procuring the fraudulent patents."

In First Nat. Bank v. Babbidge, 160 Mass. 563, 565,36 N.E. 462, 464, the court made it clear that the Atlantic Cotton Mills case supports the rule that a principal is charged with its agent's knowledge and notice, where the agent is its sole representative in a transaction, even though the agent is personally interested, by saying:

"If Linley alone had acted in discounting the note and in placing the proceeds to his own credit, the bank would be bound by his knowledge of the circumstances under which he had obtained it from the defendants. Atlantic Cotton Mills v. Indian Orchard Mills, 147 Mass. 268 [17 N.E. 496, 9 A.S.R. 698]."

A sufficient reason for holding defendant is that it seeks to retain that which its agent wrongfully took from plaintiff. Notice aside, it is liable. The authorities support the view expressed in Munroe v. Harriman National B. T. Co.supra (85 F. [2d] 495) that: "In such a case the principal is impaled on the horns of a dilemma. If he disclaims the agent's acceptance of the property for him as unauthorized, he has no ground to retain it; on the other hand, if he retains the property, he adopts the agent's act in procuring it and must in fairness take the accompanying burden of the agent's knowledge." Connecticut F. Ins. Co. v. Commercial Nat. Bank (5 Cir.) 87 F.2d 968, supra; Maryland Cas. Co. v. Queenan (10 Cir.) 89 F.2d 155 supra; Pensacola State Bank v. Thornberry (6 Cir.) 226 F. 611, supra; Morris v. Georgia L. S. and B. Co. 109 Ga. 12, 34 S.E. 378, 46 L.R.A. 506, supra; Brookhouse v. Union Pub. Co. 73 N.H. 368, 62 A. 219,2 L.R.A. (N.S.) 993, 111 A.S.R. 623, 6 Ann. Cas. 675; Annotation, 111 A.L.R. 665. In Tremont Trust Co. v. Noyes, 246 Mass. 197,141 N.E. 93, 98, supra, the court said:

"Under these circumstances another principle of law becomes operative, namely, that where one undertakes to profit by the act of another as agent, he must adopt that act as a whole and take the bitter with the sweet. One cannot take the gains of a fraud without also bearing its burdens."

Aside from notice, plaintiff's equity is greater and he should recover. Agard v. People's Nat. Bank, 169 Minn. 438,211 N.W. 825, 50 A.L.R. 629.

In any view of the case, it seems to me that plaintiff should recover.