Opinion
August 1, 1961
Present — Bergan, P.J., Gibson, Herlihy, Reynolds and Taylor, JJ.
Appeal from an order and judgment of the Supreme Court, Franklin County, striking out the answer interposed by appellant and granting respondent's motion for summary judgment under rule 113 of the Rules of Civil Practice. Between January 14, 1957 and February 7, 1957 one Harry R. Ford, then a Supervisor of the Town of Colton, St. Lawrence County, misappropriated town funds by making the following deposits and withdrawal of funds conceded to be those of the town: (1) deposited a check made payable to "Supervisor Town of Colton", issued by the State of New York and indorsed by him "For Deposit only Credit Harry R. Ford, Supvr.", (2) deposited a check made payable to the order of "Payroll Account", drawn against the town's general fund account and indorsed by him "For Deposit Payroll Acct. Ford Watson", (3) deposited a check made payable to the order of the "Payroll account", drawn by him against the town's general fund and indorsed by him "For Deposit Only Payroll Acct." and (4) deposited a check made payable to the order of "Ford Watson" drawn by him against the town's highway fund and indorsed by him "For Deposit Only to Account of Ford Watson." There is no dispute that at all times in question, Harry R. Ford was Supervisor of the Town of Colton and that the defendant, the St. Lawrence County National Bank, Canton, New York, was a depository for town funds and at the same time maintained accounts of Ford, in his own name and in the name of "Ford Watson", a partnership. Respondent surety reimbursed the town the amount of its loss and received an assignment of the town's cause of action against appellant bank. The court below held that appellant was on notice that Ford was illegally diverting public funds to private accounts. Appellant asserts that it does not become responsible for the misappropriation of a fiduciary depositor merely by paying or honoring checks drawn upon an account in which the bank is aware trust funds are deposited citing Bischoff v. Yorkville Bank ( 218 N.Y. 106) and section 359- l of the General Business Law. While we agree that this may be substantially the rule where private fiduciaries are involved we believe a different rule prevails as to public fiduciaries. The rationale of Bischoff and section 359- l recognizes the chaos that would be caused by requiring a bank to be familiar with the provisions of all of the terms and restrictions of the myriad of private fiduciary instruments under which funds are deposited with it. Bischoff held that a fiduciary could transfer trust funds to his own account and no duty of inquiry would devolve upon the bank. But if the fiduciary then paid a personal indebtedness to the bank from his personal account the bank was charged with the knowledge that the "trust funds" in his personal account were being misappropriated, and the bank would be liable for that misappropriation and all misappropriations thereafter occurring because of such diversion of trust funds whether those subsequent checks were in discharge of the trustee's personal obligation to the bank or to some other party. It was contended in an article in the New York State Bar Bulletin (vol. 20, p. 270) that section 359- l changed this liability for subsequent checks, i.e., whereas the bank would still be on notice of a misappropriation where payment was tendered to it from the personal account in discharge of the fiduciary's personal obligation, it could be liable only for that single misappropriation and would not be liable for each misappropriation thereafter, unless, of course, it was again put on actual notice in some way; that section 359- l merely cuts off the bank's liability after each diversion of which it had actual notice and removes the onus of constructive notice as to subsequent diversions. But here we are dealing with a public official and it has been held that where the responsibilities and limitation of public officials are regulated by statutes which are readily accessible and basically similar to all public entities of the same class, the requirement of familiarity with the applicable sections of the statutes is not overburdensome and the bank is deemed to be on notice of wrongdoing when the law is not adhered to by the official ( Employers' Liab. Assur. Corp. v. Hudson Riv. Trust Co., 250 App. Div. 159, mod. 250 App. Div. 812, mod. and affd. without opinion 276 N.Y. 542). There is no indication that the Legislature by enacting section 359- l intended to change this rule with regard to public fiduciaries. Even assuming a public official to be the type of fiduciary envisaged by section 359- l, none of the subject checks come within its purview. The check from the State was obviously not one drawn by Ford on an account against which he was empowered to sign as a fiduciary and the other three checks were not deposited in his personal account but rather in one of the partnership accounts. In Employers' Liab. Assur. Corp., which we are constrained to follow, it was held that a bank which accepts for deposit to a county treasurer's personal account checks drawn by him upon the county's general funds, signed by him as county treasurer, and made payable to him personally or to cash, is chargeable with notice that the funds represented by such checks were being misappropriated and converted and is therefore liable to the county or its subrogee, since under section 147 County of the County Law, county money could be withdrawn by the county treasurer only for payment of claims ordered to be paid by the board of supervisors. In the instant case section 119 Town of the Town Law provides that where there is no town comptroller (Colton, a second class town has none) no money can be paid out by the supervisor except upon warrant, order or draft of the town clerk, after audit and allowance by the town board and that highway funds can be dispensed by the town supervisor only on order of the town superintendent of highways. Thus since there was no compliance with section 119 Town of the Town Law with respect to the three checks drawn by Ford on the town accounts the bank must assume the liability for the misappropriations. Further two of these checks were made payable to "payroll account." Without a more definite description of the payee, appellant allowed the transfer of municipal funds to the payroll account of Ford Watson. The check of the State of New York was clearly payable to Ford in his representative capacity and thus his appropriation to his own account would likewise be a payment or diversion of town funds without the necessary authorization. Order and judgment unanimously affirmed, with costs.