Opinion
No. 31013
Decided February 25, 1948.
Banks and banking — No liability ordinarily for trustee's misappropriation of deposited trust funds — Uniting or participating in breach of trust renders bank liable — Known trust funds applied toward trustee's personal debts to bank — Statute of limitations does not run until breach of trust discovered.
1. A financial institution in which trust funds are deposited ordinarily incurs no liability, where such funds are withdrawn by the trustee and applied by him to purposes which are violative of the trust.
2. A financial institution, which applies known trust funds on deposit with it, in satisfaction of personal debts owed it by the trustee or another, which funds are wrongfully taken by the trustee from the trust account for that purpose, unites and participates in the breach of trust, and such funds may be recovered from it by one who has the right, ability and capacity to maintain an action therefor.
3. A statute of limitations does not begin to run in favor of a financial institution which has united and participated in a breach of trust, until such breach is, or in the nature of the circumstances ought to have been, discovered by one who has the right, ability and capacity to sue for the wrong done.
APPEAL from the Court of Appeals for Cuyahoga county.
Levi T. Scofield, widower, of the city of Cleveland, died testate on February 25, 1917. His will provided in part as follows:
"Item II. I give, devise and bequeath to my son, William Marshall Scofield, and his successors as hereinafter provided, my block of real estate, known as the Schofield Building, situated at the corner of Euclid avenue and East Ninth street, in the city of Cleveland, Ohio, in trust, however, for the following purposes:
* * * * *
"Item VII. The trust estate hereinbefore granted shall continue in the above named trustee, and his successors, until the youngest of my grandchildren living at the time of my death, shall arrive at the age of thirty (30) years; until which time I declare that no transmissible interest in said trust property, or in the income thereof, shall be vested in any of my aforesaid children or grandchildren, or their issue."
There were three grandchildren of Levi T. Scofield, ultimate beneficiaries of the trust, viz., Douglas F. Schofield, who became 21 years of age on August 3, 1931, Josephine S. Thompson, who became 21 years of age on September 14, 1933, and Mary Scofield, who became 21 years of age on March 28, 1939.
William M. Scofield, the original trustee, resigned his office on April 22, 1935, and on April 25, 1935, the Probate Court of Cuyahoga county appointed Douglas F. Schofield successor trustee of the trust created by the will of Levi T. Scofield.
In December of 1935, Douglas F. Schofield, as trustee, commenced an action at law in the Court of Common Pleas of Cuyahoga county against The Cleveland Trust Company, an Ohio banking corporation, hereinafter called "the bank," to recover from it a sum in excess of $1,000,000 with interest.
In essence, the fifth amended petition alleged that during the years 1917 to 1935, inclusive, the bank, the depository of the funds of the Levi T. Scofield trust estate, which funds consisted of rentals derived from the Schofield Building, knowingly aided and participated with William M. Scofield, the original trustee, and Sherman W. Scofield, son of Levi and long-time manager of the Schofield Building, their agents and representatives, in diverting certain of the trust funds to the personal use and benefit of William and Sherman Scofield and to other purposes which were violative of the trust.
Answering, the bank denied "each and every allegation contained in the fifth amended petition not hereinbefore expressly admitted to be true" and averred that the alleged cause of action asserted against it "is barred by the statute of limitations."
A reply was filed and the issues were joined.
Upon the trial of the cause much evidence and many exhibits were introduced. The judge who heard the controversy, being requested to do so, made "Findings of Fact and Conclusions of Law," which were complete and comprehensive.
In paragraph numbered 14 of the "Findings of Fact," a general finding was made as follows:
"The defendant bank had actual knowledge that the funds deposited in all the accounts — * * * for the estate of Levi T. Scofield, deceased — were trust funds, but in the handling and disbursing of funds from such accounts containing Schofield Building funds the defendant bank acted in good faith and did not have any actual knowledge of the use of funds for nontrust purposes and did not have knowledge of any facts which could make it guilty of bad faith."
In disposing of this case we consider two items of particular importance.
(1) The evidence showed and the trial court found that William M. Scofield and Sherman W. Scofield borrowed from the bank at various times, upon promissory notes signed by them, the aggregate sum of $11,922.69, representing real estate and commercial loans for their personal advantage, and that such indebtedness was repaid by checks drawn on funds of the trust estate. Moreover, the evidence showed and the trial court found that "Sherman Scofield maintained his own commercial account at the defendant bank and a total of $19,683.42 of the funds of the trust were used for deposit in Sherman's personal account for the correction of overdrafts therein."
Commenting on these matters, the trial court said in its "Findings of Fact":
"While the bank was chargeable with notice, when these checks were presented to it in payment upon notes or for deposit in the overdrawn account, that trust funds were being used in payment of the personal obligations of William and Sherman, it had no knowledge that such payments were wrongfully made or that such payments were in breach of trust. All such payments on the notes and overdrafts were made more than four years prior to the commencement of this action, the last of them [having been] made on March 13, 1931."
In its "Conclusions of Law," covering the above transactions, the trial court stated:
"When checks upon the trust funds were tendered to and accepted by the bank in discharge of obligations of William or Sherman to the bank, the bank was chargeable with notice that trust funds were being used for a personal purpose and, except for the statute of limitations, is liable to the plaintiff for such sums so used. Such sums include $11,922.69 received by the defendant in payment of the commercial and real estate loans to William and Sherman Scofield, and also $19,683.42 of checks deposited in the personal account of Sherman Scofield maintained at the defendant bank, which operated to cure overdrafts in such sum. However, since all of these transactions occurred more than four years prior to the commencement of this action, recovery from the bank for all such sums is barred by the statute of limitations, General Code 11224 (4)."
(2) The other item concerns the payment of $10,000 by the bank to the Warner Swasey Company of Cleveland in satisfaction of a promissory note which William and Sherman Scofield had signed with others as makers. Such payment was effected less than four years before the commencement of the present action, by applying to the indebtedness at two different times the proceeds of two checks for $5,000 each made payable to the order of "Wm. M. Scofield, trustee of the estate of Levi T. Scofield."
With respect to this transaction, the trial court said, in its "Conclusions of Law":
"* * * since the bank was an actual trustee for the collection of the Warner Swasey indebtedness, its duties were higher than those as a mere depository of trust funds and while no bad faith can be attributed to it, it had actual knowledge that the two trust checks were being used for the payment of the personal debt of the trustee and others, and is therefore liable for said principal sum of $10,000 with interest at 6% per annum upon $5,000 from May 6, 1932, and upon $5,000 from July 28, 1932."
The judgment entry of the Court of Common Pleas reads as follows:
"This cause came on to be heard upon the pleadings and the evidence, and the arguments of counsel, and, a jury having been waived, was duly submitted to the court.
"The court, pursuant to request of counsel duly made, having separately stated its findings of fact and conclusions of law herein, files them herewith and incorporates them herein and makes them a part of this journal entry.
"The court, upon the issues joined, finds in favor of the plaintiff and against the defendant, The Cleveland Trust Company, with relation only to the so-called Warner Swasey Transaction described in the pleadings and referred to in the findings of fact and conclusions of law in the sum of $10,000, with 6% interest upon $5,000 from May 6, 1932, and 6% interest upon $5,000 from July 28, 1932.
"It is therefore considered that the plaintiff recover from the defendant, The Cleveland Trust Company, the sum of $16,557.61, and costs herein, for which judgment is rendered."
Exceptions were taken to the judgment by both plaintiff and defendant, but the plaintiff-trustee alone took an appeal to the Court of Appeals on questions of law. That court affirmed the judgment below.
Allowance of the motion to require the Court of Appeals to certify its record brings the case before this court for review.
Messrs. Garfield, Baldwin, Jamison, Hope Ulrich and Mr. Robert F. Lee, for appellant.
Messrs. Jones, Day, Cockley Reavis, Mr. Leslie Nichols, Mr. George H. Rudolph, Mr. Frank C. Heath and Mr. Richard S. Douglas, for appellee.
The general rule pertaining to the liability of banks in connection with the misappropriation or misapplication by fiduciaries of trust funds deposited with such banks is stated in 7 American Jurisprudence, 374, Section 520:
"Although a bank may know or be charged with notice of the trust character of funds on deposit with it, yet it is not necessarily liable if such funds are withdrawn by the fiduciary and misappropriated by him. The contract between the bank and the depositor is that the former will pay according to the checks of the latter, and when they are drawn in proper form by a depositor upon an account standing in his name as fiduciary, the bank is bound to presume that he is acting lawfully within the performance of his duty; in the absence of knowledge or notice to the contrary, the bank may and is bound to assume that the fiduciary will appropriate the money, when drawn, to a proper use, and incurs no liability in making such payment. Even though a fiduciary is drawing checks which the bank may surmise or suspect are for his personal benefit, it is bound to presume, in the absence of adequate notice to the contrary, that they are properly and lawfully drawn. It is not the business of the bank to administer the trust. To charge banks with the duty of supervising the administration of trusts when, in the due course of business, they receive checks and drafts drawn by, or payable to and properly indorsed by, trustees or fiduciaries in their trust capacity, would place an unreasonable burden upon them and seriously interfere with commercial transactions. The law imposes no such duty upon them."
This court does not weigh evidence. The record in this case has been examined and we have come to the conclusion that competent evidence exists to support the determinations and judgments below, except as concerns two matters. First, the acceptance and application by the bank of known trust funds in the amount of $11,922.69 to pay a personal indebtedness owed it by William and Sherman Scofield on real estate and commercial loans made to them, and, second, the acceptance and application by the bank of the further amount of $19,683.42 in known trust funds to cover overdrafts by Sherman Scofield on the personal account which he had at the bank.
On the bases that the present action is "in tort at law" brought solely by the successor trustee and that the bank did not actually know that breaches of trust were involved in the transactions described in the preceding paragraph, which breaches occurred more than four years before the commencement of the present action, the trial court adjudged and the Court of Appeals agreed that the four-year limitation prescribed by Section 11224 (4), General Code, operated in favor of the bank to defeat these claims.
Application was made of the rule that an action barred by a statute of limitations against a trustee who is vested with the legal title to the trust property and while so vested had the power to sue is likewise barred against a successor trustee or the beneficiaries, as the case may be, notwithstanding the beneficiaries were under disability during the period of limitation. 34 American Jurisprudence, 291, Section 375; 53 Corpus Juris Secundum, "Limitations of Actions," 955, 956, Section 19; 3 Scott on Trusts, 1777, Section 327 et seq. Veazie v. McGugin, 40 Ohio St. 365, 375.
To this general rule, however, there are several exceptions.
For example, the general rule is inapplicable and a successor trustee or the beneficiaries are not barred where a trustee has wrongfully disposed of trust property and is unable or unwilling to bring suit for its recovery. 53 Corpus Juris Secundum, "Limitations of Actions," 956, Section 19; 4 Bogert on Trusts Trustees, 2776, Section 955.
Neither does the general rule apply in an action against one who has united or participated with a trustee in a breach of the trust, the defendant in such case becoming a trustee ex maleficio. In a situation of that kind, a statute of limitations does not begin to operate until the breach of trust is, or in the nature of the circumstances ought to have been, discovered by one who has the right, ability and capacity to sue. Hall v. Windsor Savings Bank, 97 Vt. 125, 121 A. 582. See, also, American Natl. Bank of Enid v. Crews, 191 Okla. 53, 126 P.2d 733, and 2 Restatement of Trusts, 974, Section 327.
The view also has been expressed that a statute of limitations does not run against beneficiaries where the trustee has wrongfully transferred trust funds to another, who knows the character thereof, for the latter's benefit. In these circumstances, the trustee is not representing or acting for the trust or the beneficiaries, but for the recipient of the funds and, therefore, the beneficiaries have no representative through whom they can be barred. Happy v. Cole County Bank, 338 Mo., 1025, 93 S.W.2d 870.
A perusal of the record in the instant case plainly discloses that from the date of the death of Levi T. Scofield in 1917 up to and including a part of the year 1935, William M. Scofield, as trustee or purporting to act as such (he was not actually appointed by the Probate Court until 1926), and Sherman W. Scofield, as manager of the Schofield Building until the year 1932, were in full and complete control of collecting and disbursing the funds of the trust, and handled them about as they pleased. Other beneficiaries had little or no knowledge concerning the management and expenditures of such funds, and, as has already been mentioned, three of the ultimate beneficiaries were minors during at least a part of the time the misappropriations and misapplications of the trust funds were being made.
The fifth amended petition herein contains the following allegations:
"Plaintiff says that he had no knowledge of the facts herein alleged concerning the Warner Swasey agreement and matters in connection therewith until after filing of plaintiff's second amended petition; that he had no knowledge or information concerning the affairs and administration of said trust prior to the month of January, 1935; * * *."
Evidence in the record substantiates such allegations with respect to both the successor trustee and other beneficiaries of the trust.
We are in full accord with the proposition that a bank in which trust funds are deposited is not ordinarily liable for monies withdrawn and applied by the trustee to illegal purposes. Otherwise, the banking business would be perilous indeed. But where the bank knows or in particular instances has good reason to believe that a misappropriation of trust funds is being made, especially where the bank is the direct beneficiary of such misappropriations, it finds itself in a different position.
"If a person has knowledge of such facts as would lead a fair and prudent man, using ordinary care and thoughtfulness, to make further inquiry, and he fails to do so, he is chargeable with knowledge which by ordinary diligence he would have acquired." Mitchell v. First Natl. Bank of Hopkinsville, 203 Ky. 770, 263 S.W. 15.
" 'The law seems to be well settled that where an individual attempts to pay his personal indebtedness out of the funds of a * * * trust, by checks drawn against the funds of such * * * trust, the person who receives the same is put upon notice as to the right of the individual to pay his indebtedness out of the funds of the * * * trust, and is bound at his peril to inquire as to the right of the individual so to do.' Moneys so wrongfully received may be recovered." Norristown-Penn. Trust Co. v. Middleton, 300 Pa. 522, 526, 150 A. 885, 886.
Here, when William and Sherman Scofield took trust funds, known by the bank to be such, and used such funds to pay their individual indebtedness to the bank with the co-operation of the bank, the latter is fairly chargeable with uniting and participating in a breach of the trust. 4 Bogert on Trusts Trustees, 2774, Section 955.
In the case of Mook, Trustee, v. Akron Savings Loan Co., 87 Ohio St. 273, 101 N.E. 278, a trustee borrowed money from a savings 'and loan company, pledging as collateral security certain stock certificates of the company which it knew belonged to the trust estate. The company also cashed other like certificates at the instance of the trustee, paid him the money and cancelled the certificates. The trustee used the money so obtained for his own purposes and died insolvent. In an action by the successor trustee against the company this court held as set forth in the third paragraph of the syllabus:
"The company was a party to this breach of trust and conversion, and it must surrender to the plaintiff as successor in the trust, the pledged securities, and pay to him the value of those cancelled, with accumulated dividends and interest."
See, also, Shuster v. North American Mortgage Loan Co., 139 Ohio St. 315, 344, 40 N.E.2d 130, 143.
"Generally, a bank which receives in payment of a fiduciary's personal indebtedness to it, or applies to an overdraft in his individual account, known trust funds transferred from the fiduciary's trust account to his individual account, is liable to the fiduciary's principal or cestui que trust for the money so received or applied by it." 145 A. L. R., 448, annotation, citing cases from a number of jurisdictions.
A case in point is that of Pennsylvania Co. for Insurance on Lives v. Ninth Bank Trust Co., 306 Pa. 148, 158 A. 251. In the course of its opinion in that case the court remarked:
"It is well settled that one who accepts a check drawn on a trust account to the order of the trustee in payment of a personal debt of the trustee is liable to the beneficiary if the trustee has committed a breach of his obligation * * *.
"The defendant having received trust property from a trustee with knowledge that he was acting wrongfully — was paying off his personal debt with trust funds — joined in the breach of the trust and thus became a trustee ex maleficio. * * *
"But the statute [of limitations], however, does not begin to run in favor of a participant in a breach of trust until the discovery of the fraud, that is, until the cestui knows, or under the circumstances ought to know, of the facts that give rise to his cause of action."
We are of the opinion that the above principles should govern in the instant case.
In 1935, sometime after the spoliations had occurred, a new trustee was appointed. Upon qualifying, he took title to the trust estate and became vested with all rights of action pertaining to the trust property. At that time the beneficiaries had no title to the trust property, no control over it, and no right of action growing out of its management and disposition. The successor trustee alone was the proper person to bring an action to recoup funds which had been wrongfully and illegally diverted from the trust estate. See 40 Ohio Jurisprudence, 524, Section 227; Hart v. Citizens Natl, Bank, 105 Kan. 434, 185 P. 1; Section 11244, General Code.
As has previously been observed, the statute of limitations does not begin to operate in favor of one who has received known trust funds from a trustee to pay a personal indebtedness owed by the trustee to the recipient of the funds, until such incident is, or in the nature of the circumstances ought to have been, discovered. Within a short time after the breaches of trust had been uncovered, the successor trustee brought his action; such action was timely and the lower courts were in error, in applying the four-year limitation contained in Section 11224 (4), General Code, to defeat the claims of the successor trustee with respect to the items under discussion.
Wherefore, the judgment of the Court of Appeals is reversed as to the transactions in which the bank received $11,922.69 of known trust funds in payment of the real estate and commercial loans made to William and Sherman Scofield individually and as to the transactions wherein the bank received $19,683.42 of trust funds to cover overdrafts on Sherman's personal bank account; such judgment is affirmed in all other respects.
Final judgment for the amounts as indicated above, with interest, is hereby rendered in favor of the trustee, appellant herein, and against the bank and the cause is remanded to the Court of Common Pleas to carry the judgment of this court into execution, including the computation of interest on each of the various amounts misappropriated from the date of each of such misappropriations.
Judgment reversed in part and affirmed in part.
WEYGANDT, C.J. MATTHIAS, HART, SOHNGEN and STEWART, JJ., concur.