Gunster v. Scranton Illuminating, Heat & Power Co.

Opinion by Mr. Justice Mitchell,

The referee found that there was nothing in the transaction so far out of the ordinary course of business as to make it unusual or such as should excite suspicion had the bank been acting through any of its officers except Jessup. Jessup was the treasurer of the defendant company, and the person who made its promissory notes, had them discounted for it, and drew its checks. These were usually, but not always, taken from its regular check book, and the body of them was usually in the hand writing of the secretary and book-keeper, though signed by Jessup. The signature of the depositor is the essential feature of a check, and a bank is not bound to pay any attention to the hand writing of the other parts, unless it shows something to excite suspicion. Nor was there anything to put the bank upon inquiry in the fact that the drafts were drawn to Jessup’s own order. The check in payment of which the drafts were issued was drawn “ to the order of Dft. N. Y.” ■ and there was nothing on the face of the transaction to indicate that it was not for the regular and legitimate business of the defendant company.

The referee finding that if Jessup had not been an officer of the bank there would have been no valid defense, thus reduced the case to a question of law whether Jessup’s knowledge of his own fraud, at the time of its perpetration, carried with it knowledge or notice to the bank which would prevent its availing itself of a credit on the check. He took the affirmative view and the court below sustained him.

*335 The authorities on this question are not uniform. In the case most relied upon by the learned referee, First Nat. Bank v. New Milford, 36 Conn. 93 , the cashier of the bank was also treasurer of the town, and in the latter capacity had been accustomed to borrow money for the town upon notes made by him in its name. Having in his capacity as cashier embezzled the funds of the bank, he drew a note for $3,000, as treasurer of the town, entered it upon the books of the bank as if regularly discounted, and thus covered his embezzlement. In a suit on the note it was held that the bank could not recover. The decision is put upon two grounds, first, that the treasurer did not intend to pledge the credit of the town, but that “ he drew the note, entered it in the books and caused it to be filed by the clerk, as a false representation and cover, precisely as he made other false representations and false entries, intending to restore the money and take out the note, and not intending to onerate the town. If that is so, there was no meeting of minds and no purchase of the note or contract of loan which will sustain this action.” This was apparently the view of the majority of the court, but the opinion then goes on to add as a second reason that even if there was a contract of loan “ it was made by Conklin as agent of thé town with Conklin as agent of the bank. . . . He as agent of the bank had full knowledge therefore of the fraud; and now the bank if they ratify his contract and confirm his agency, must accept his knowledge and be bound by it, precisely as if the loan had been made and the knowledge had by the board of directors.” The first ground thus set forth does not appear to have been adopted in any other case, but the second has very respectable authorities in its favor, among which may be cited First Nat. Bank of Monmouth v. Dunbar, 118 Ill. 625 ; Farmers’ and Traders’ Bank v. Kimball Milling Co., 33 Am. & Eng. Corp. Cases, 336; and similar in principle, Bank of U. S. v. Davis, 2 Hill (N. Y.), 451; Holden v. N. Y. & Erie Bank, 72 N. Y. 286 ; Webb v. Graniteville Manufacturing Co., 11 S. C. 396 ( 32 Am. Rep. 479 ).

On the other hand the principle has been distinctly repudiated by several courts of equal authority, and in the latest text book it is laid down without qualification that an exception to the general rule that notice to the agent is notice to the principal, “ arises in case of such conduct by the agent as raises a *336 clear presumption that he would not communicate the fact in controversy, as where the agent acts for himself in his own interest and adversely to that of the principal: ” 1 Am. & Eng. Ency of Law, 2d ed. 1145, and cases there cited.

In First Nat. Bank v. Christopher, 40 N. J. Law, 435, it was held after a review of the cases, that a director offering a note of which he is the owner to the bank of which he is a director, for discount, is to be regarded as a stranger, and the bank is not chargeable with the director’s knowledge of fraud or want of consideration for the note. And in DeKay v. Hackensack Water Co., 38 N. J. Eq. 158, it was held that where the same person is an officer of two corporations, and he transfers securities issued by one to the other, with knowledge that they are not valid except in the hands of an innocent holder for value, his knowledge is not to be attributed to the transferee, Van Fleet, V. C. saying, “ I understand the law to be that where an agent representing two principals concocts a scheme to defraud one of them for the benefit of the other, it will be presumed that he did not disclose to the principal he intended to cheat, the means by which he intended to effect his purpose.”

In Innerarity v. Merchants’ Nat. Bank, 139 Mass. 332 , the exception was held to be well established that notice to the agent would not be deemed notice to the principal where the communication of the facts would necessarily prevent the consummation of a fraudulent scheme which the agent was engaged in, and the distinction sometimes made upon the actual presence of the agent, as e. g. a bank director at the meeting where the transaction was concluded was said not to be of importance. The same view was followed in Allen v. So. Boston R. R. Co., 150 Mass. 200 , and Corcoran v. Snow Cattle Co., 151 Mass. 74 . See also, to the same effect, Barnes v. Trenton Gas Light Co., 27 N. J. Eq. 33; Winchester v. Balt. & Sus. R. R. Co., 4 Md. 231 ; First Nat. Bank v. Gifford, 47 Iowa, 575 ; Frenkel v. Hudson, 82 Ala. 158 ; Third Nat. Bank v. Harrison, 10 Fed. Rep. 243, 252; Davis Wheel Co. v. Davis Wagon Co., 20 Fed. Rep. 699; Thompson-Houston Co. v. Capitol Co., 65 Fed. Rep. 341. And in Platt v. Birmingham Axle Co., 41 Conn. 255 , it was held that the knowledge of the secretary of a prior assignment of stock, standing in his wife’s name, could not be imputed to the corporation, to defeat the corporation’s lien for subsequent advances to *337 the wife upon the same stock, and the decision does not seem to have been thought in conflict with Bank v. New Milford, supra, as no comment or reference was made to that case.

An instructive case is Atlantic Mills v. Indian Orchard Mills, 147 Mass. 273 . The same person was treasurer of two corporations, and fraudulently drew cheeks upon each in favor of the other when needed to balance his accounts and make his cash appear correct on examination. There had been also bona fide loans from each to the other, made in the same way. The court held that the account between them should be stated by charging each with the amount wrongfully transferred to it from the other, so that each should lose the exact amount taken from it by its treasurer acting in his capacity as such. This case was regarded by the learned referee in the court below as belonging to the class which imputes notice to the principal from knowledge of the agent, and the judgment could have been reached on that view. But the decision is put explicitly on the ground that “ a party, even though innocent, cannot avail himself of an advantage obtained by the fraud of another unless there is some consideration moving from himself,” referring to authorities as early as Lord Manseield, and citing among others, Loring v. Brodie, 134 Mass. 453, 468 . It is to be noted that this case, though leading to a different judgment, was not regarded in the subsequent decisions in 139, 150 and 151 Mass, cited supra, as conflicting with them, and that the principle of it would result in the same judgment, though for a different reason, as that in Bank v. New Milford, 36 Conn. 93 , supra, and reconcile that case not only with the later case in the same court, Platt v. Birmingham Axle Co., 41 Conn. 255 , supra, but with the cases in the class we are now considering. And the same principle would sustain First Nat. Bank v. Dunbar, 118 Ill. 625 , supra, and probably other cases in the class imputing notice to the principal from knowledge by the agent.

We are of opinion' that the second class of cases have not only the preponderance of authority but of sounder reason. The rule that knowledge or notice on the part of the agent is to be treated as notice to the principal is founded on the duty of the agent to communicate all material information to his principal, and the presumption that he has done so. But legal presumptions ought to be logical inferences from the natural *338 and usual conduct of men under the circumstances. But no agent who is acting in his own antagonistic interest or who is about to commit a fraud by which his principal will be affected does in fact inform the latter, and any conclusion drawn from a presumption that he has done so is contrary to all experience of human nature. If it be urged, as in some cases, that the principal having put the agent in his place should, as a matter of public policy, be held answerable for all the latter does, a sound answer is suggested by the court in Allen v. So. Boston R. R., 150 Mass. 200, 206 , that an independent fraud committed by an agent on his own account is beyond the scope of his employment, and bears analogy to a tort wilfully committed by a servant for his own purposes, and not as a. means of performing the business entrusted to him by his master.

We have not found or been referred to any express authorities in our own state. The point was touched upon in Millward-Cliff Cracker Co.’s Est., 161 Pa. 157, 167 , and some observations of the learned auditor in that case seemed to be based on Bank v. New Milford, 36 Conn. 93 , and the line of decisions following it. But the facts show that the bank was endeavoring to retain an advantage and assert a claim founded on a fraud in which its own officer had participated, and the case therefore comes plainly within the rule adopted in Atlantic Mills v. Indian Orchard Mills, 147 Mass., 273 , supra, which we think entirely sound. In Wilson v. Second Nat. Bank, 7 Atl. Rep. 145 , it was said per curiam, “ the knowledge of Willcock as treasurer of the tool company cannot be imputed to the bank of which he was cashier, unless he revealed that knowledge to some one or more of its officers.” The decision does not rest directly on that ground, but the expression shows that the views of the court were in harmony with those we now express. Even, therefore, if the present case be made to turn on the question of knowledge it was erroneously decided.-

But we do not regard knowledge as the pivotal point of the case.- Upon that point both parties would stand equal. Both might by mere inference be charged with knowledge, as- the fraud was committed by an agent with authority to act for both, but in fact neither had or in the nature of things could have any knowledge at all, and neither was under any obligation to presume that its agent would be guilty of- fraud. The real *339 question is, in what capacity did Jessup commit the fraud? And it is clear that it was as treasurer of the appellee. It was as treasurer he presented the notes for discount, and as treasurer he drew the checks for the proceeds. Both acts were within his authority as treasurer and would have been lawful if they had been honest, but he drew the money on drafts which were the property of the company, and when he embezzled the money it was the money of the company. The bank had no part in his act, and gained nothing by it. The fraud had its inception and its consummation in acts done in his capacity of treasurer of the defendant company, and it should bear the loss.

Judgment reversed, and record remitted with directions to enter judgment for the plaintiff, for the full amount of his claim.