State Ex Rel. v. First State Bank of Ripley , 19 Tenn. App. 556 ( 1935 )

As I construe the opinion of the majority of the court, it commits the court to the proposition that sureties on a corporate guardian's bond who have actively participated in the conversion of the ward's funds in the sense that they were commingled with the general funds of the principal, are, as against the rights of general creditors, entitled to relief under the doctrines of exoneration or subrogation, and this before they have discharged their liability as sureties. If such be the holding of the majority of the court, I am unable to agree to it.

"Subrogation, while distinguishable from exoneration as against the debtor or contribution from others, is used to enforce both remedies." 25 R.C.L., 1312. "Subrogation in its broadest sense is the substitution of one person in the place of another with reference to a lawful claim or right and is frequently referred to as the doctrine of substitution. It is a device adopted or invented by equity to compel the ultimate discharge of a debt or obligation by him who in good conscience ought to pay it. Its phases are various but it preserves its characteristic features throughout. It is the machinery by which the equity of one man is worked out through the legal rights of another." 25 R.C.L., 1311, 1312.

The doctrine of subrogation is an established branch of equity jurisprudence. "It does not owe its origin to statute or custom, but is a creature of courts of equity, having for its basis the doing of complete and perfect justice between the parties without regard to form. It is a doctrine, therefore, which will be applied or not according to the dictates of equity and good conscience and considerations of public policy, and will be allowed in all cases where the equities of the case demand it. . . . The right to it depends upon the facts and circumstances of each particular case and to which must be applied the principles of justice." 25 R.C.L., 1313.

The doctrine of subrogation, being of equitable origin and nature, "its operation is controlled and governed by the principles of equity and it is only when an applicant has an equity to invoke and where innocent persons will not be injured that a court can interfere. To entitle one to subrogation, his equity must be strong and his case clear." 25 R.C.L., 1314, 1315.

Subrogation is the creature of equity and will not be permitted where it will work an injustice to the rights of those having equal or superior equities or where it will operate to defeat an equal right. 25 R.C.L., 1321.

Our own cases are thoroughly in accord with the foregoing principles. Dixon v. Morgan, 154 Tenn. 389, 397, 285 S.W. 558; Federal Surety Co. v. Union Indemnity Co., 161 Tenn. 621,33 S.W.2d 421.

Whether the doctrine under which the sureties here in question seek relief be termed the doctrine of subrogation or exoneration is to my mind immaterial upon the phase of the question under consideration, since both doctrines essentially are of an equitable nature and applied according to the maxims and principles of equity.

I have found no authority, and the opinion of the majority of the court refers to none, that supports the proposition that one may obtain relief under the doctrine of subrogation from the consequences of his own fault or negligence. Upon the other hand, in 60 Corpus Juris, 708, section 21, it is said:

"The person seeking subrogation must act fairly and equitably and be free from fault. It will not be allowed where he has intermeddled with the rights of others, or is guilty of fraud or culpable negligence, or where he would derive an advantage from, or establish his claim through, his own negligence, or, in any way, would thereby reap advantage from his own wrongdoing, or from the wrongful act of one under whom he claims; nor will it be allowed where to do so would relieve a party from the consequences of his own wrongful or unlawful act."

See, also, 25 R.C.L., 1326.

When the bank mingled the funds of the wards for which it was guardian with its own funds, it was guilty of a conversion, and all those who knowingly participated therein were likewise guilty. State v. McLemore, 162 Tenn. 129, 37 S.W.2d 103.

It is conceded that the bank does not have enough assets to pay the depositors and general creditors in full. Practically all of its cash will be required to pay the claims of these wards. The presumption that the funds which the bank had on hand at the time it went into the hands of a receiver are the trust funds belonging exclusively to its wards is based purely and solely upon a fiction, raised by equity, as the only practicable method of accomplishing justice to cestui que trustent who are wholly innocent of any wrongdoing. That this fiction will be resorted to when necessary to do justice to such parties is settled by our cases, but I find nothing in the books, or in the rule or principle underlying it, which would justify a resort to it for the purpose of permitting one whose act necessitated the raising of the fiction to profit by it.

In other words, the very necessity of raising the fiction was brought about solely by the act of the bank and its officials in commingling the trust funds with its general funds. This was a wrongful act on the part of the bank and those of its officials participating therein, and to permit such participating officials to have, directly or indirectly, the benefit of the fiction predicated upon such wrongful act would be to permit them to profit by their own wrong, in that, by a resort to the fiction, they would be relieved of their liability as sureties on the guardian bonds, and the amount that would otherwise be available for the purpose of paying general creditors would be decreased to the extent of the amount paid the wards.

If these sureties, who participated in the commingling of the fund, were held to their liability on the guardian bonds, the general creditors who are wholly innocent in the matter would have that much more for the payment of their claims. To permit them to be discharged in full of their liabilities in preference to the rights of the general creditors seems to me to be a misconception and misapplication of the doctrine under which they seek relief.

It is argued, however, that if the banks had in the first instance invested the trust funds as required by statute instead of commingling them with its general funds, that the general funds would have been that much less. In other words, it is said that through the act of the bank in commingling the trust funds with its general funds the latter were augmented to that extent, and that hence no harm has in reality been done the general creditors.

One fallacy of this argument seems to me to be that depositors and general creditors dealing with the bank had no knowledge of such augmentation or that a portion of the general funds of the bank were impressed with what was, so far as they were concerned, a secret trust. In dealing with the bank they had a right to assume that the cash on hand as reflected by the bank's statements was a part of the general assets available for the payment of general creditors in the event of insolvency. If they had known that a portion of the cash was in fact a trust fund and would not be available for the payment of general creditors, it is entirely possible that they would not have dealt with the bank at all.

From any view of the case I cannot escape the conclusion that, through the opinion of the majority of the court, sureties who are shown to have been at fault in the premises are being preferred to the general creditors of the bank who are wholly innocent. I cannot reconcile this view with my idea of fundamental principles of equity which are applicable to the situation as I see it, and to the application of the doctrine upon which the sureties rely for relief. Therefore, I respectfully dissent from that part of the opinion of the majority of the court which grants any relief to any surety shown to have been guilty of participation in the conversion of the funds. In all other respects, I concur in the majority opinion.