Opinion
No. 46/163.
04-14-1921
LIBERTY TRUST CO v. HAGGERTY et al.
McCarter & English, of Newark, for complainant. Lum, Tamblyn & Colyer, of Newark, for defendant Mayhew. David Bobker, of Newark, for defendant Lehlbach, trustee.
Suit by the Liberty Trust Company against William J. Haggerty and others to impress a trust on certain funds. Decree advised dismissing the bill.
McCarter & English, of Newark, for complainant.
Lum, Tamblyn & Colyer, of Newark, for defendant Mayhew.
David Bobker, of Newark, for defendant Lehlbach, trustee.
FIELDER, V. C. The proofs show that the defendant Haggerty was conducting a sham importing business in the city of Newark, his real purpose being to obtain money from others, ostensibly for investment in his business, or on personal loans on his promise of repayment with interest at a high rate. Complainant is a trust company doing a banking business, with whom Haggerty kept a checking bank account. He induced a bookkeeper in complainant's employ to so manipulate the books of the bank that checks drawn on the bank by Haggerty were honored and paid out of an apparent balance toHaggerty's credit, when in fact he had insufficient funds to meet his checks. The first false bookkeeping entry in Haggerty's account appears under date of July '24, 1918, and not again until August 14, 1918, from which latter date to on or about December 9, 191.8, the false entries occur nearly every day and by means of the conspiracy between Haggerty and the bookkeeper the former succeeded in obtaining on his overdrafts a total of nearly $53,000 of the bank's funds. The falsification of Haggerty's account was accidentally discovered by one of the bank occials on December 9, 1918, and Haggerty was arrested the following day. A petition in bankruptcy was filed against Haggerty December 20, 1918, and he was duly adjudged a bankrupt, and a trustee in bankruptcy was appointed. The total amount realized on his assets was about $9,500 and upward of $150,000 in claims have been filed with his trustee.
The defendant Mayhew entered Haggerty's employ about May 1, 1918. Shortly prior to that date he had been attracted by the inducements held out by Haggerty, and had made loans to him at usurious interest rates. Subsequent to the date of his employment, Mayhew continued to make loans to Haggerty on the latter's promissory notes, receiving from time to time payments of interest at rates which ran from 20 per cent. to 40 per cent. per annum and partial payments on principal. These payments of principal and interest were made by Haggerty's checks to the order of Mayhew, drawn on and honored by complainant during the time complainant's bookkeeper was engaged in falsifying Haggerty's account, and the amount paid by complainant on these checks, against which Haggerty actually had no funds to his credit, amounts to $19,250.
Complainant seeks to have the money so received by Mayhew impressed with a trust in its favor, upon the theory that the checks given Mayhew by Haggerty and drawn on complainant were not received by Mayhew as a bona fide holder for value, and that they were not effectual to pass title to Mayhew of money stolen by Haggerty from complainant. In the event that Mayhew should not be required to account for such money directly to complainant, the complainant and the trustee in bankruptcy contend that at the time of such payments Haggerty was insolvent, and that Mayhew had reasonable cause to believe that he was insolvent, and that he (Mayhew) was being preferred, and because all the payments to Mayhew were made within four months before the filing of the petition in bankruptcy, they must be repaid to the trustee. Complainant then insists that a trust on such funds should be declared in its favor for the reason that the bankrupt's estate should not be permitted to profit by the crime of the bankrupt.
There seems to be no doubt that Haggerty was insolvent at the time he made the payments on account of his indebtedness to Mayhew, but my conclusion from the evidence is that Mayhew was not aware of that fact and had no reasonable cause to believe that he was being preferred as a creditor, and therefore the payments made to Mayhew are not voidable under the federal Bankruptcy Act (U. S. Comp. St. §§ 9585-9656). I am also satisfied that Mayhew had no reason to believe that Haggerty's bank account was being falsified, and that Haggerty's checks on complainant to Mayhew's order were paid with money Haggerty was stealing from complainant. Haggerty's checks came to Mayhew as payments on account of principal and interest due on Haggerty's promissory notes which evidenced Mayhew's loans to Haggerty. On receiving these checks, Mayhew became a bona fide holder for value. Comp. Stat. p. 3738, § 25. As the holder of these checks, Mayhew had no legal right to exact payment on them from complainant, because they did not constitute a contract between complainant and Mayhew and complainant had the right to determine whether to pay them or not. Comp. Stat. p. 3756, § 189; Creveling v. Bloomsbury National Bank, 46 N. J. Law, 255, 50 Am. Rep. 417; National Bank of New Jersey v. Berrall, 70 N. J. Law. 757, 58 Atl. 139, 66 L. R. A. 599, 103 Am. St. Rep. 821, 1 Ann. Cas. 630.
In making its election whether to pay or not, complainant was bound to know the state of its account with Haggerty. The fact that his account appeared to be good when actually it was not is immaterial. Complainant placed its bookkeeper in a position where he had the opportunity to falsify the account, and it must be held accountable for his acts as against an innocent third party who presented checks received in the ordinary course of business. Having exercised its option to pay or not to pay by honoring the checks, complainant cannot recover the money back from the payee. This is under the general rule that payment of a check by a bank upon which it is drawn, under the mistaken belief that the maker of the check had sufficient funds to his credit to pay the check, is a finality, and the bank cannot recover from the payee of the check the amount so paid. One of three reasons and sometimes all three reasons have been assigned for the rule: First, because there is no privity between the payee and the bank; second, because the bank always has the means of knowing the state of the depositor's account by an examination of its books, and therefore the payment is not a mistake within the meaning of the general rule which permits the recovery of money paid under amistake of fact; and, third, because to permit the bank to repudiate the payment would destroy the certainty that must pertain to commercial transactions of this sort and give way to the uncertainty, delay, and annoyance which would result if the bank could at some future time call on the payee for the return of money paid him on a check (National Bank of New Jersey v. Berrall, supra; Citizens' Bank of Norfolk v. Schwarzschild, 109 Va. 539, 64 S. E. 954, 23 L. R. A. (N. S.) 1092; Spokane & Eastern Trust Co. v. Huff, 63 Wash. 225, 115 Pac. 80, 33 L. R. A. (N. S.) 1023, Ann. Cas. 1912D, 491. So it has been held that the certification of a check by a bank upon the mistaken belief that the drawer had sufficient funds to his credit, when in fact the apparent credit was the result of the deposit of a forged check to the credit of the drawer's account, will not excuse the bank from paying the certified check (Fidelity Trust Co. v. Baker, 60 N. J. Eq. 170, 47 Atl. 6), and it has also been held that where a bank official having authority to certify checks certified one for an amount which he knew to be in excess of the drawer's account, the effect of the certification is payment, precisely as if the bank had paid the money on it instead of making a certificate of its being good, and the bank is estopped from denying that it has sufficient funds with which to pay the check. State v. Scarlett, 91 N. J. Law, 200, 102 Atl. 160, 2 A. L. R. 86.
And it is the rule that a person receiving stolen money innocently in due course of business, in payment of a pre-existing debt, is a holder for value as against the former owner. Fidelity Trust Co. v. Baker, 60 N. J. Eq. 170, 173, 47 Atl. 6; Village of Mineral City v. Gilbow, 81 Ohio St. 263, 90 N. E. 800, 25 L. R. A. (N. S.) 631; Benjamin v. Welda State Bank, 98 Kan. 361, 158 Pac. 65, L. R. A. 1917A, 704, 707.
All the checks given by Haggerty to Mayhew, save one, were deposited by Mayhew in his bank under a general indorsement, and were paid by complainant to Mayhew's bank. It might be argued that when May new deposited the checks in his bank, the amount thereof was credited to him; that the money so credited was the money of his bank; that the transaction was, in effect, a sale of negotiable paper by Mayhew to his bank; that the money complainant afterward paid was paid to Mayhew's bank, and not to Mayhew, and that the right to recover money paid by mistake exists only as against the party to whom the payment was made. But this question of privity between the parties to this action was not raised, and has not been considered.
I shall advise a decree that complainant's bill be dismissed.