G.R. No.

32576

November 6, 1930

FULTRON IRON WORKS CO., plaintiff-appellee, vs. CHIN ! NKING COR"OR TION, #T L., defendants. CHIN ! NKING COR"OR TION, appellant. Feria and La O, and Gibbs and McDonough for appellant. Claro M. Recto and DeWitt, Perkins and rad! for appellee.

STR##T, J.: This action was instituted on June 23, 1926, in the Court of First Instance of the Cit of !anila " the Fulton Iron #or$s Co., a %elaware corporation havin& its principal place of "usiness in 't. (ouis, !issouri, and dul authori)ed under the laws of the *hilippine Islands to en&a&e in "usiness in this countr . The defendants na+ed in the co+plaint are the China ,an$in& Corporation, a do+estic corporation havin& its principal place of "usiness in the Cit of !anila, and one '. C. 'chwar)$opf. In the petitor part of the co+plaint -ud&+ent is sou&ht a&ainst the two defendants -ointl and severall for the su+ of *131,19..1/, with interest. 0s a &round of action a&ainst the two defendants it is asserted in the co+plaint that the a+ount clai+ed " the plaintiff is part of a lar&er su+ of +one 1*1.6, 19..1/2 "elon&in& to the plaintiff which had "een deposited in the defendant "an$ " 'chwar)$opf durin& the ear 1922, and which had "een +isappropriated and e+"e))led " hi+, with the full $nowled&e and consent of the defendant "an$. The idea underl in& the action, as a&ainst the "an$, is that it has "een &uilt of what +a perhaps "e st led a civil co+plicit in the +isappropriation of the +one for which recover is sou&ht. 3pon hearin& the cause, upon the separate answers of the two defendants, the trial court a"solved 'chwarc$opf fro+ the co+plaint, for the reason that in two prior cri+inal proceedin&s he had "een convicted of the offense ofestafa, "ased upon his +isappropriated of the sa+e +one , and in said proceedin&s the o"li&ation to inde+nif the plaintiff had "een i+posed upon hi+ in the a+ount of *146,19..4/. 5is 5onor, however, &ave -ud&+ent in favor of the plaintiff, the Fulton Iron #or$s Co., to recover of the defendant "an$ the su+ of *12.,2//.36, with lawful interest fro+ June 23, 1926, the date of the filin& of the co+plaint, and with costs. Fro+ this -ud&+ent the defendant "an$ appealed. It appears that in the +onth of !arch, 1921, the plaintiff the Fulton Iron #or$s Co., of 't. (ouis, !issouri, sold to the ,inal"a&an 6state, Inc., a *hilippine corporation, +achiner for a su&ar +ill, for which the purchaser e7ecuted three notes a+ountin& to a"out 89/,///. The first of these notes "eca+e due :cto"er 1, 1921, and the other two on 0pril 1, 1922. ;either of the three notes was paid at +aturit , owin& to the fact that, "efore the notes fell due, the ,inal"a&an 6state, Inc. suspended pa +ents and passed into the hands of the *hilippine ;ational ,an$, its principal creditor, for ad+inistration. The conse<uentl dela in the pa +ents of the notes caused the plaintiff to e+plo a fir+ of law ers in !anila, of which '. C. 'chwar)$opf was then a +e+"er, to represent the plaintiff in an effort to o"tain securit for the inde"tedness, with a view to its later collection. 0t the ti+e this retainer was effect, 'chwar)$opf was in 't. (ouis, on a visit to the 3nited 'tates, and in order that the plaintiff +i&ht co+pl with the laws of the *hilippine Islands in the +atter of o"tainin& a license to transact "usiness here, the plaintiff e7ecuted a for+al power of attorne authori)in& the +e+"ers of 'chwar)$opf=s fir+ -ointl and severall to accept service in actions and to do other thin&s necessar to ena"le the plaintiff to secure the conte+plated license. It is noteworth that the authorit of 'chwar)$opf=s fir+ to represent the plaintiff in the collection of the clai+s a"ove +entioned did not proceed fro+ this power, "ut had its ori&in in the e+plo +ent of said fir+ as attorne s in the +atter. 'chwar)$opf returned to !anila in the earl part of ;ove+"er, 1921, and the law fir+ to which he pertained was dissolved on ;ove+"er 1>, 1921. 3nder the dissolution a&ree+ent the +atter of handlin& this collection devolved upon 'chwar)$opf, and he alone was thereafter concerned in the +atter.

:n %ece+"er 13, 1921, 'chwar)$opf opened a personal account, as a depositor, in the China ,an$in& Corporation " +a$in& a deposit, on that date, of the su+ of *>.9. This account was at all ti+es +odest in si)ed, and on Januar 1, 1922, the credit "alance therein was *>43.3>. This account has little or no si&nificance in the case, and it "eca+e defunct " 'epte+"er 1, 1922. It +a "e o"served, however, that a few of the deposits in this account appear to have "een ta$en fro+ account ;o. 2 to which reference will presentl "e +ade. In the earl part of the ear 1922, the financial condition of the ,inal"a&an 6state, Inc. "e&an to i+prove? and on Januar 13, 1922, %. !. 'e+ple, +ana&er of the *hilippine 'u&ar Centrals 0&enc , a depart+ent of the *hilippine ;ational ,an$, drew chec$ ;o. >.4 for the su+ of *1/,///, pa a"le to the order of ' dne C. 'chwar)$opf, and delivered the sa+e to hi+ in part pa +ent of the inde"tedness owin& to the plaintiff fro+ the ,inal"a&an 6state, Inc. 3pon receivin& this chec$ 'chwar)$opf si&ned a receipt as @attorne -in-fact of Fulton Iron #or$s Co.@ The character of attorne -in-fact, thus assu+ed " 'chwar)$opf, was of course a +ere fiction, as the power of attorne which he reall possessed was li+ited to other +atters. The point, however, is reall of no +o+ent. The chec$ for *1/,/// a"ove +entioned was dul indorsed " 'chwar)$opf and deposited " hi+ in a new account with the defendant "an$, $nown as @;o. 2 account.@ This +one was thereafter withdrawn fro+ the "an$ fro+ ti+e to ti+e " 'chwar)$opf, upon his personal chec$s, and used for his individual purposes. In the appealed -ud&+ent the defendant is held lia"le for this +one , a +ere oversi&ht resultin& apparentl , fro+ a confusion of this +atter with the +ore i+portant issues involved in other parts of the case. There is no proof that the defendant "an$ had an $nowled&e, or was char&ea"le with notice, that the *1/,/// thus deposited and drawn out "elon&ed to an person other than 'chwar)$opf hi+self? and, as depositor, 'chwar)$opf of course had a"solute control of the account. 0 depositor is presu+ed to "e the owner of funds standin& in his na+e in a "an$ deposit? and where a "an$ is not char&ea"le with notice that the +one deposited in such account is the propert of so+e other person than the depositor, the "an$ is -ustified in pa in& out the +one to the depositor or upon his order, and cannot "e lia"le to an other person as the true owner. It is hardl necessar to cite authorit upon a proposition so +anifestl in accord with the usa&e and the co++on sense of the co++ercial co++unit . The proposition stated is i+plicit in all the cases concerned with the <uestion of the lia"ilit of a "an$ to its depositors and other persons clai+in& an interest in the deposits. *roceedin& to the ne7t collection effected " 'chwar)$opf upon account of the plaintiff=s clai+ a&ainst the ,inal"a&an 6state, Inc., we find that on 0pril 11, 1922, 'chwar$opf received, fro+ the +ana&er of the *hilippine 'u&ar Centrals 0&enc , a chec$ for the su+ of *61,23..>/. This chec$ was +ade pa a"le on its face to @'. C. 'chwar$opf 0ttorne -in-Fact, Fulton Iron #or$s Co., or order.@ 0fter indorsin& this chec$ in the for+ in which it was drawn, 'chwar)$opf opened a new account with the defendant "an$, entitled @'. C. 'chwar)$opf, 0ttorne - in-Fact, Fulton Iron #or$s Co.,@ and deposited said chec$ therein. This account re+ained undisputed on the "oo$s of the "an$ for so+e two +onths, durin& which period it had an accretion of a"out *13/. !eanwhile, the ;o. 2 account which had "een esta"lished "ac$ in Januar , "eca+e depleted, "ut the +ana&er of the "an$, in view, no dou"t, of the funds to 'chwar)$opf=s credit in the third account conceded to hi+ a credit in ;o. 2 account of *2>,///. , June 1>, 1922, said account "eca+e overdrawn to the e7tend of *22, 144.39, and it was o"vious that the li+it of the conceded credit would soon "e reached. The +ana&er of the "an$ then intervened and re<uested 'chwar)$opf to settle the overdraft. To acco+plish this 'chwar$opf +erel transferred, " chec$, the +one to his credit in his special account as plaintiff=s attorne -in-fact to the ;o. 2 account. The a+ount thus transferred was *61,36/.91, and the effect of the transfer was to a"sor" the overdraft and place a credit "alance of nearl *4/,/// in ;o. 2 account. 'chwar)$opf then purchased a draft on ;ew Aor$ in the a+ount of 81>,///, and after so+e dela trans+itted the sa+e " +ail to the plaintiff. This draft cost 'chwar)$opf the su+ of *3/,3.>./2, and it was the onl re+ittance ever +ade " hi+ to his client. The principal <uestion that arises upon the facts a"ove stated is, whether the defendant "an$ is lia"le to the plaintiff for the su+ of *22, 144.39 which was thus applied to the pa +ent of 'chwar)$opf=s personal inde"tedness resultin& fro+ his overdraft in the ;o. 2 account. 3pon this point the first thin& to "e noted is that the ver for+ in which the third account was carried on the "oo$s of the defendant "an$ was sufficient to char&e the "an$ with notice of the fact that the +one deposited in said account "elon&ed to the Fulton Iron

#or$s Co. and not to 'chwar)$opf. It is co++onl said, and trul said in a le&al sense, that +one has no ear+ar$s. ,ut "an$ accounts and co++ercial paper can have ear+ar$s, and these ear+ar$s consist of the word or words which infalli"l conve to the +ind notice that the +one or credit represented " the account with which the are associated or the instru+ent upon which the are written ri&htfull "elon&s to so+e other person than the one havin& control thereof. 0 "an$ cannot per+it, +uch less re<uire, a depositor who is in control of a trust fund to appl an part of the sa+e to his individual inde"tedness to the "an$. The decisions to this effect are unifor+l accordant and it is "elieved no credita"le authorit to the contrar can "e produced fro+ an source. The e7pression @trust fund,@ in this connection, is not a technical ter+, and is applied in a loose sense to indicate the situation where a "an$ account or ne&otia"le securities of an sort are under the control of a person other than the true owner. The followin& decisions are instructive as illustratin& different phases of the rule a"ove stated, the selection havin& "een +ade with a view to the fact that the cases cited are for the +ost part accessi"le in one or +ore series of annotated reports? Central ;at. ,an$ of ,alti+ore vs. Conn. !ut. (ife Ins. Co., 1/4 3. '., >4? 26 (aw. ed., 693? 3nion 'toc$ Aards ;at. ,an$ vs. !oore, 2> C. C. 0., 1>/? .9 Fed., ./> 'a re vs. #eil, 94 0la., 466? 1> (. B. 0., >44? 0+. Trust C ,an$in& Co. vs. ,oone, 1/2 Da., 2/2? 4/ (. B. 0., 2>/? 66 0+. 't. Bep., 16.? First %enton ;at. ,an$ vs. Eenne , 116 !d., 24? 0nn. Cas. 19193,, 133.? 0llen vs. *uritan Trust Co., 211 !ass., 4/9? (. B. 0. 191>C, >19 1and note2? 6+erado Far+ers= 6l. Co. vs. Far+ers= ,an$, 2/ ;. %., 2./? 29 (. B. 0. 1;. '.2, >6.? ,aird vs. (oren) 1;. %.2, 61 (. B. 0., 139>, 1399 1note2? #alters ;at. ,an$ vs. ,antoc$, 41 :$la.,, 1>3? (. B. 0. 191>C, >31? Interstate ;at. ,an$ vs. Cla7ton 9. Te7., >69? 6> (. B. 0., 92/? 1/4 0+. 't. Bep., 99>? ,o le vs. ;orthwestern ;at. ,an$ of 'uperior, 12> #is., 499? 1 (. B. 0. 1;. '.2 111/ 0+. 't. Bep., 9>1? 3nited 'tates Fidelit C D . Co. vs. 0doue, 1/4 Te7., 3.9? 3. (. B. 0. 1;. '.2, 4/9? 0nn. Cas. 1914,, 66.? 3nderwood (td. vs. ,an$ of (iverpool 119242, 1 E. ,., .>>. 3pon the facts "efore us it is evident that when credit to the e7tent of *2>,/// was conceded to 'chwar)$opf in his personal account ;o. 2, the e e of the "an$er was fi7ed upon the lar&e a+ount then upon deposit to 'chwar$opf=s credit in his account as attorne -in-fact? "ut of course, if a "an$ cannot appl the +one in such an account, or even per+it it to "e applied, to the personal inde"tedness of the fiduciar depositor, it is not per+issi"le for the "an$ to e7tend personal credit to such depositor upon the faith of the trust account. Fro+ an point that the +atter "e viewed, the lia"ilit of the "an$ is clear to the e7tent of *22144.39 this "ein& the a+ount derived fro+ 'chwar$opf=s account as attorne -in-fact which was a"sor"ed " his overdraft in account ;o. 2 when the transfer of the "alance in the for+er account to the latter account was effected, in the +anner alread stated. #e ne7t proceed to consider the disposition +ade of the proceeds of the third chec$ collected " 'chwar)$opf upon account of plaintiff=s clai+ a&ainst the ,inal"a&an 6state, Inc., fro+ the *hilippine ;ational ,an$. The a+ount of this collection was *1/4, 9>9.6/, and it was paid, on :cto"er 11, 1922, " a cashier=s chec$ on the *hilippine ;ational ,an$, pa a"le @to the order of '. C. 'chwar)$opf, attorne -in-fact, Fulton Iron #or$s Co.@ 3pon receivin& this chec$, 'chwar)$opf indorsed it in proper for+, " writin& thereon the words @'. C. 'chwar)$opf, attorne -in-fact, Fulton Iron #or$s Co.,@ to which he added another indorse+ent consistin& of his own na+e alone, and deposited the chec$ in his personal account ;o. 2 with the defendant "an$. The chec$ thus delivered to the "an$ was collected " it fro+ the *hilippine ;ational ,an$ in ordinar course. Thereafter, in the course of the ne7t few +onths, 'chwar)$opf withdrew, upon chec$s written " hi+self, the entire a+ount of the +one to his credit in account ;o. 2, thus +isappropriatin& the +one in said account to his own use. It will "e noted that the +one thus s<uandered co+prised not onl the proceeds of the chec$ last +entioned "ut the residue, consistin& of a few thousand pesos, which had "een left in ;o. 2 account after the overdraft had "een paid and 'chwar)$opf had re+itted the draft of 81>,/// to his principal in the 3nited 'tates. #e consider that, fro+ a le&al point of view, the situation with respect to this +one is precisel the sa+e as that presented with respect to the +one which ca+e into the account later " deposit of the chec$ for *1/4,9>9.6/ a"ove +entioned, "ecause as to "oth funds, lia"ilit is sou&ht to "e fi7ed upon the "an$ " reason of its $nowled&e of the source fro+ which said funds were derived? and in this connection it should "e noted that there is no proof showin& that the defendant "an$ had an $nowled&e of the +isappropriation of this +one " 'chwar)$opf other than such as +i&ht have "een derived fro+ an inspection of its own "oo$s and the chec$s " which the +one was paid in and paid out.

The feature of the case now under consideration "rin&s us, it +ust "e ad+itted, into de"ata"le territor , "ut a discri+inatin& anal sis of the le&al principles involved leads to the conclusion that the defendant cannot "e held lia"le for +one paid out " it in ordinar course on chec$s, in re&ular for+, drawn " 'chwar)$opf on the ;o. 2 account. The speciali)ed function of "an$ is to serve as a place of deposit for +one , to $eep it safel while on deposit, and to pa it out, upon de+and to the person who effected the deposit or upon his order. 0 "an$ is not a &uardian of trust funds deposited with it in the sense that it +ust see to their proper application nor is it its "usiness to pr into the uses to which +one s on deposit in its vault are "ein& put? and so lon& as it serves its function and pa s the +one out in &ood faith to the person who deposited it, or upon his order, without $nowled&e or notice that it is in fact assistin& in the +isappropriation of the fund, the "an$ will "e protected. 0s is well said " the author of the +ono&raphic article on ,an$s and ,an$in& in Bulin& Case (aw, It would seriousl interfere with co++ercial transactions to char&e "an$s with the dut of supervisin& the ad+inistration of trust funds, when, in due course of "usiness, the receive chec$s and drafts in proper for+ drawn upon such funds in their custod . The law i+poses no such dut upon the+ 13 B. C. (., >49? see also cases cited in . C. J., 644, 64>, note 2>2. There are, it is true, decisions fro+ a few courts, deservedl held in hi&h estee+, to the effect that a "an$ +a$es itself an effective acco+plice in the conversion of a trust fund when, with notice of the character of such fund, it per+its the person in control thereof to deposit it in his personal account. ,ut the decided wei&ht of -udicial authorit is to the contrar ? and it is &enerall held that the +ere act of a "an$ in enterin& a trust fund to the personal account of the fiduciar , $nowin& it to "e a trust fund, will not +a$e the "an$ lia"le in case of the su"se<uent +isappropriation of the +one " the fiduciar . 13nited 'tates Fidelit C D . Co. vs. First ;at. ,an$, 19 Cal. 0pp., 43.F Doodwin vs. 0+. ;at. ,an$, 49 Conn., >>/? ,atchelder vs. Cen. ;at. ,an$ of ,oston, 199 !ass., 2>? 0llen vs. *uritan Trust Co., 211 !ass., 4/9? (. B. 0. 191>C, >19? Date Cit ,ld&. C (oan 0ssoc. vs. ;ational ,an$ of Co++erce, 126 !o., 92? 2. (. B. 0., 4/1? 4. 0+. 't. Bep., 63/? ,ischoff vs. Aor$ville ,an$, 219 ;. A., 1/6? 5avana C. B. Co. vs. Enic$er"oc$er Trust Co., 199 ;. A., 422? (. B. 0. 191>,, .2/2. The "an$ has the ri&ht to presu+e that the fiduciar will appl a trust fund to its proper purpose, and at an rate the "an$ is not re<uired to send a courier with the +one to see that it reaches a proper destination. In the case "efore us an inti+ate stud of the chec$s which ca+e into the defendant "an$ a&ainst account ;o. 2 over a series of +onths, would have led a discernin& person to the conclusion that the plaintiff=s +one was "ein& s<uandered, "ut such an inference could not le&iti+atel have "een drawn fro+ the first few chec$s which were drawn upon the fund, and it would "e hard to sa -ust where the "an$, supposin& its suspicions to have "een aroused, should have intervened. ;o such a dut is i+posed. :f course, when the "an$ "eca+e a part to the application of part of the plaintiff=s +one to the satisfaction of the overdraft in ;o. 2 account, it was directl char&ea"le with $nowled&e of the +isappropriation of the fund to the e7tent of the overdraft and that fact, as we have alread said, +ade the "an$ lia"le. ,ut this rule cannot "e e7tented to su"se<uent acts of +alversation and +isappropriation co++itted " the fiduciar a&ainst the real owner of the fund. Further+ore, it is undenia"le that a "an$ +a incur lia"ilit " assistin& the fiduciar to acco+plish a +isappropriation, althou&h the "an$ does not actuall profit " the +isappropriation. 0 decision illustratin& this aspect of the law is found in #ash"orn vs. (inscott 'tate ,an$ 19. Ean., 6992, where a "an$, to help the treasurer of a lod&e to conceal his defalcations, per+itted hi+ to overdraw, and when his account were to "e audited, issued to hi+ a deposit certificate for the shorta&e, pa a"le to the lod&e. 0fter the audit was +ade, the certificate was returned and cancelled, and the shorta&e reappeared. The court held that a loan had "een +ade to the treasurer personall , and that the "an$ "eca+e lia"le to the lod&e upon cancellin& the deposit certificate.la"phil.net :ur discussion of this phase of the case should not "e concluded without reference to ,ischoff vs. Aorville ,an$ 1219 ;. A., 1/62, which undou"tedl affords so+e support to the contention of the appellee that the defendant "an$ is lia"le not onl for the proceeds of the last chec$ collected " 'chwar)$opf, "ut for all of the +one which was transferred to account ;o. 2 fro+ the account of 'chawar)$opf as attorne -in-fact. This decision co+es, it +ust "e ad+itted, fro+ a court of hi&h repute. ,ut we are una"le to accept the court=s conclusions, as applica"le to the facts "efore us. In the case +entioned it appeared that an e7ecutor, na+ed *o&&en"ur&, havin& +one on deposit in a certain "an$ to his credit as e7ecutor, &raduall withdrew a"out

813,/// fro+ said deposit " chec$s drawn " hi+, over a lon& period of ti+e, in the character of e7ecutor. These chec$s were indorsed " *o&&en"ur& in his own na+e si+pl and deposited in the defendant Aor$ville ,an$ to his personal credit. 0t the inception of this series of transactions *o&&en"ur& was inde"ted " note to the defendant and pa +ents were +ade on this note and other notes thereafter e7ecuted in favor of the "an$, out of the funds transferred as a"ove stated. The court held, upon the facts "efore, it that the defendant $new at all ti+es that the credits created " the various deposits throu&h chec$s of the e7ecutor were assets pertainin& to the estate of which *o&&en"ur& was e7ecutor? and fro+ this fact, in connection with the +isapplication of part of the +one to the pa +ent of the personal notes of *o&&en"ur&, the court held that the defendant "an$ was lia"le to the e7tent of the whole a+ount +isappropriated " +eans of the personal account. It will "e noted that this decision was +ade in third instance, after a trial in first instance possi"l "efore a -ur and after the -ud&+ent a&ainst the "an$ "een affir+ed upon appeal in the appellate division of the 'upre+e Court. The prior histor of the case was therefore such as to entitle the findin&s of fact of the two prior courts of &reat wei&ht, and these courts had found in effect that the defendant "an$ had acted in "ad faith. If not e7plica"le upon this &round, the decision in the Court of 0ppeals +ust "e considered a uni<ue variant fro+ accepted doctrine in this that while repudiatin& the idea, favored " a few courts that the act of depositin& a trust fund in the personal accounts of the fiduciar is an effective act of conversion on the part "oth of "an$ and fiduciar , the court nevertheless held that the act of the "an$ in per+ittin& the application of part of the +one to the personal inde"tedness of the fiduciar afforded a sufficient "asis for findin& the "an$ to have "een an acco+plice in the su"se<uent +isapplication, " the fiduciar , of other portions of the deposit. #e can accede to the first of these propositions "ut not to the second. In this connection we refer to the 0nnotation appended to 0llen vs. *uritan Trust Co. 1(. B. 0. 191>C, >19, >292, where the pertinent cases are anal )ed and the conclusion stated 1 that, " the wei&ht of authorit , the placin& of a trust fund in the personal account of the fiduciar does not +a$e the "an$ lia"le for a su"se<uent +isappropriation of the +one " the for+er. For the rest it is enou&h to sa that there is no proof in this case that the defendant "an$ had an &uilt connection in fact with the dishonest acts of 'chwar)$opf, in s<uanderin& the contents of the ;o. 2 account after he had +ade his re+ittance of 81>,/// to his principal. In conclusion we ou&ht to add that the le&al principles involved in this decision are not directl deduci"le fro+ the provisions of the ;e&otia"le Instru+ents (aw, which is in force in this -urisdiction 10ct ;o. 2/312? and there is no provision of the Civil Code or Code of Co++erce directl "earin& upon the point under consideration. The lia"ilit of the defendant "an$, to the e7tent reco&ni)ed in this decision proceeds upon the funda+ental idea that a creditor cannot appl to the o"li&ation of his de"tor +one which as he $nows "elon&s to another, without the consent of the latter, G a principle i+plicit in all law. #e note that the attorne s for the appellant "an$ have su&&ested in their "rief that, supposin& the "an$ to have "een an acco+plice of 'chwar)$opf in the +isappropriation of the plaintiff=s +one , its su"sidiar lia"ilit was e7tin&uished as a result of the cri+inal proceedin&s a&ainst 'chwar)$opf. This su&&estion is clearl untena"le, with respect to the lia"ilit which is fi7ed upon the "an$ " this decision. Fro+ what has "een said it follows that the appealed -ud&+ent +ust "e +odified and the sa+e is here" +odified " reducin& the a+ount of the -ud&+ent a&ainst the "an$ to the su+ of *22,144.39 with lawful interest fro+ June 23, 1926 until date of pa +ent, 2without pronounce+ent as to costs. 'o ordered.