CAMERER v. CALIFORNIA SAVINGS & COMMERCIAL BANK OF SAN DIEGO et al.a1
A rehearing was granted in this case in order that we might consider cases not before us at the time of our former decision. After careful review of the facts and the law we are constrained to adhere to our earlier conclusions.
Respondent instituted this action against appellants, and others, to recover possession of $45,500 par value of bonds and other securities, or their value, if possession could not be had. Other relief was sought which it is not necessary that we consider here. Judgment was rendered against Edward Rainey as Superintendent of Banks for the recovery of the securities in his possession of the par value of $44,500, or their market value in the sum of $39.385, in case redelivery could not be made. The case against the California Savings & Commercial Bank of San Diego was ordered dismissed. We will hereafter refer to the California Savings & Commercial Bank of San Diego as the bank.
I. I. Irwin was a banker with an experience of more than eighteen years in the city of San Diego. Respondent was a medical officer in the United States Navy, a friend and acquaintance of Irwin's, and a depositor in the financial institutions with which he was connected.
Irwin organized the California Savings & Commercial Bank of San Diego and became its president. He owned four thousand one hundred twelve out of a total issue of five thousand shares of its capital stock. He dictated the policies of the bank, except during the last few months of its existence as a going concern. About the time of its organization he persuaded respondent to transfer his account to the bank and to purchase fifty shares of its capital stock.
The California Safe Deposit Company of San Diego conducted a safe deposit business in the basement beneath the bank. While it had a separate corporate entity, it was a subsidiary of the bank and was controlled by it. On November 5, 1927, respondent rented a safe-deposit box in which he kept his valuable papers. According to the signature card and rental agreement, C. B. Camerer, Mrs. C. B. Camerer, his wife, and I. I. Irwin were authorized to open the box. Respondent was frequently away from San Diego for considerable periods of time on duty with ships, at sea, or at hospitals in other localities. During such times Irwin, without the knowledge and consent of respondent, opened the safe-deposit box, clipped and collected the coupons and performed other services for him.
The bank continuously lost money from the time it opened until it was closed. Either quarterly, or semiannually, Irwin placed in the profit and loss account of the bank sufficient money to cover the loss of the period succeeding his prior payment so that no loss would appear on the books.
Irwin began using respondent's bonds in the fall of 1927, and continued using them in 1928 and 1929, whenever the bank needed money to make up its deficit. In all but one of these transactions he described his actions as follows:
“A. Well, as far as my memory serves me, at each quarter the bank needed money to pay the deficit, and when that occurred I took these bonds and sold them to the bank and deposited this money to my account and gave the bank a check to pay on the profit-and-loss account. Later on, when I had money in my account, I took the bonds back, and later on I put them back again. That is my recollection of it.
“Q. Did some of the other officers of the bank know the nature of these transactions? A. I suppose so. * * * Those bonds were turned over to the official who had charge of the bonds, and he made out the statement and credited the amount to my account and charged the bonds to the bank's bond account. That's my recollection.
“Q. During this period that you were speaking of, the bank was not making any profits, but, on the contrary, was losing money? A. Yes.
“Q. And needed the money at the end of each quarter to pay its running expenses? A. Yes.
“Q. And these bonds were simply manipulated in that way so that the bank would have money? A. Yes. * * *
“Q. Into which of the bank's accounts was that put? A. It was charged to my account and credited, as far as I know, to the profit-and-loss account of the bank.
“Q. Was the same thing done in regard to money ostensibly raised by the other negotiations with these bonds that you say were similarly sold to the bank? A. As far as I remember.
“Q. All went into the profit-and-loss account of the bank and it was needed for the running expense of the bank? A. Yes, sir.”
Respondent at no time prior to the closing of the bank in July, 1930, had any knowledge that Irwin had sold any of his bonds or securities or used them as a pledge to secure payment of a promissory note to the bank, and prior to November 21, 1929, did not know that Irwin had removed any of the securities from the safe-deposit box.
The “sales” of respondent's securities to the bank were made by Irwin upon his express understanding with the other bank officials that they were to be kept separate from other securities owned by the bank; that the bank would not sell them; that Irwin would repurchase them when he could; that the coupons would be clipped and delivered to Mr. Irwin. Irwin repurchased all of the securities “sold” to the bank prior to September, 1929, and returned them to the Camerer safe-deposit box.
In the latter part of September, 1929, Irwin needed over $20,000 to make good the losses of the bank. He removed securities of the par value of $22,500 from the safe-deposit box of respondent and “sold” them to the bank, at their market value, with the instructions we have outlined. These were never repurchased by Irwin, but, with the exception of one $1,000 bond which matured and was delivered to Irwin, remained in possession of the bank and were taken over by the Superintendent of Banks when he closed it.
In the latter part of November, 1929, respondent made an unexpected and hurried return to San Diego. Irwin contacted him and explained that he wanted to rent the use of some of the securities. He explained to Camerer that the bank had ways of making profits from the securities in addition to their regular interest. Camerer consented and gave Irwin the securities he desired which were the same ones which Irwin had “sold” to the bank in September, 1929. They were all in Camerer's safe-deposit box, though how, when or by whom they were taken from the bank safe and returned to the Camerer safe-deposit box is not explained. Irwin gave Camerer the following receipt and agreement:
“California Savings & Commercial Bank of San Diego
San Diego, Cal., Nov. 21, 1929
from C. B. Camerer
by I. I. Irwin
As security for the return of said Bonds I hereby deposit with C. B. Camerer
Certificate No. /59 for two hundred (200) shares of the capital stock of the California Savings & Commercial Bank of San Diego to be redelivered to me upon the return by me to C. B. Camerer of the above Bonds.
1/414% (one quarter of one per cent.) Premium as hire to be paid by I. I. Irwin to C. B. Camerer or $56/25 (Fifty six 25/100 Dollars)
for each three months or less
November 21, 1929
I. I. Irwin.”
On December 31, 1929, the bank again needed funds to make up its deficit. Irwin had one of his employees execute a promissory note to the bank in the sum of $23,000 and pledged $23,000 par value, of respondent's securities for the payment of this note. The money was deposited to the credit of the employee, transferred to Irwin's account, then transferred to the profit and loss account of the bank. These securities are now in the possession of the Superintendent of Banks.
On January 8, 1930, Irwin telephoned the residence of respondent. Respondent was not at home and Irwin explained to Mrs. Camerer that he could use more securities under the same arrangement as before. She communicated with her husband who consented to the transaction. She went to the bank, opened the safe-deposit box, where the exact securities which Irwin desired to use were reposing, delivered them to Irwin and took a receipt in substantially the same form as the one dated November 21, 1929. The securities were the identical ones pledged to the bank to secure the note of December 31, 1929. How they were returned to the safe-deposit box does not appear unless an explanation is offered in the testimony of Irwin that they might have been delivered to the bank after the date of the note.
Some time after the 8th of January, 1930, the bank returned to Irwin $54,000 of the money he had paid to it. Later, on demand of other officers of the bank, Irwin paid the bank over $70,000 of his private funds which were used to adjust irregular transactions not connected with his use of the Camerer securities. Some time before the bank was closed, and after January 8, 1930, officers of the bank, other than Irwin, learned that the securities “sold” to the bank in September and pledged on December 31, 1929, were not the property of Irwin but belonged to Camerer.
Numerous other facts were developed at the trial which form the basis of extended arguments in the briefs. From the view we take of the case it is not necessary to extend this opinion by detailing these facts or considering the questions of law which counsel raise and are based upon them.
The trial court found that the bank was insolvent on July 23, 1930; that it had been taken over by the Superintendent of Banks on that day, together with the Camerer securities of the par value of $44,500; that these securities have remained in the possession of the Superintendent of Banks; that Irwin, in September and December, 1929, had neither right nor authority to sell, transfer, pledge or convey any interest in the securities to the bank and that the purported sale and pledge were made without the knowledge or consent of Camerer; that the money derived from the “sale” and pledge of the securities went into the funds and assets of the bank; that the receipt given by Irwin to Camerer on November 21, 1929, was given after the purported “sale” to the bank of the same securities described in the receipt; that the same was true of the receipt dated January 8, 1930; for the securities pledged to the bank on December 31, 1929; that Camerer had no notice or knowledge of the sale or pledge of his securities until after the bank was closed on July 23, 1930; that all, or most of, the securities so sold or pledged to the bank were purchased by Camerer through the bank, and this fact was known to the assistant cashier of the bank at the time of the purported “sale” and pledge; that the two receipts for the securities dated November 21, 1929, and January 8, 1930, and signed by Irwin individually were executed by him for and on behalf of and for the benefit of the bank; that all the interest coupons were detached from the securities while in the possession of the bank, delivered to Irwin or the agent of Camerer, and deposited in Camerer's personal account in the bank; that all of the “sales” of the Camerer securities to the bank, and their pledge, between the fall of the year 1927 and January 9, 1930, were made by Irwin wrongfully, without any authority and for the purpose of showing fictitious assets of the bank in order to deceive the Superintendent of Banks; that the bank had notice and knowledge through its officers that Irwin did not have title to the securities at the time of their “sales” and pledge; that the bank received the benefit of the unlawful sale and pledge of the securities to it.
All of the foregoing findings are supported by ample evidence or by reasonable inferences to be drawn from it.
The trial court made the following finding: “That in the transactions above referred to the said plaintiff acted in all respects as an ordinary, prudent person would act, having full confidence at all times in the integrity and honesty of the said defendant Irwin as president of the said California Savings & Commercial Bank of San Diego, * * * plaintiff was not negligent in accepting the receipts above referred to or in permitting the said California Savings & Commercial Bank of San Diego to borrow the said bonds and securities as represented by said receipts above referred to, and the said plaintiff was not negligent in any of the acts done or taken by him, and was not negligent in the omission of any acts whatsoever.” This finding is seriously assailed by appellants.
It will shorten this opinion to state frankly that if the bank were not an insolvent institution with its assets in the possession of the Superintendent of Banks, but were a going concern, we would unhesitatingly affirm a judgment which would require the return to Camerer of the securities which had been taken from him by the dishonest acts of the president of the bank. We are not impressed with the argument that Irwin was acting in his private and not his official capacity in obtaining possession of the securities and in “selling” and pledging them to the bank. We are equally unimpressed with the argument that the receipts signed by Irwin on November 21, 1929, and January 8, 1930, gave Irwin authority to sell or pledge the securities. The “sale” occurred in September, 1929, two months before the first receipt was executed, and the pledge on December 31, 1929, a number of days before the second receipt was signed and delivered to Camerer. He had no knowledge of a prior conversion of his securities. That a person cannot ratify the unauthorized act of another, of which he had no knowledge, is too elemental to need support of authority. We are equally unimpressed with the argument that the bank and its officers, other than Irwin, neither had nor should have had notice of the fraudulent character of the several transactions in which Irwin purported to “sell” and pledge the securities. A large part, if not all of the securities, had been purchased for Camerer by the bank. The bank was not to dispose of any of them but was to hold them for repurchase by Irwin. They were not to be placed among the securities owned by the bank, but were kept separate until a bank examiner ordered the practice discontinued a short time before the bank was closed. The coupons were clipped and delivered to Irwin, he giving his check to the bank for their face value. The coupons, or most of them, were deposited to Camerer's personal account. The “sales” were known to be “wash sales.” The signer of the note was known to be a “dummy” and at least two officers of the bank objected to making the loan. All the transactions with the securities were made for the purpose of concealing the losses of the bank and deceiving the Superintendent of Banks as to its actual condition. Surely these and other facts which must have been known to the responsible officers of the bank should have caused them to inquire into the good faith of the transactions.
We must inquire into the position of the Superintendent of Banks, representing as he does the innocent depositors and other creditors of the bank, and determine if he can successfully defend this action when the bank could have no adequate defense.
The Superintendent of Banks in taking over an insolvent bank acts for the creditors of the institution and its depositors. Hoff v. First State Bank of Watson, 174 Minn. 36, 218 N. W. 238; In re Farmers' Exchange Bank of Toronto, 55 S. D. 190, 225 N. W. 307; First State Bank of Herrick v. Conant, 117 Neb. 562, 221 N. W. 691; Bush v. Lien, 57 S. D. 501, 234 N. W. 29; Cockrill v. Abeles (C. C. A.) 86 F. 505; Case, as Receiver, v. Terrell, 11 Wall. 199, 20 L. Ed. 134; Kennedy v. Gibson, 8 Wall. 498, 19 L. Ed. 476.
The Superintendent of Banks, in taking over the assets of an insolvent bank, and acting for the creditors and depositors, can assert defenses which are not available to the bank. Wood v. Kennedy, 117 Cal. App. 53, 3 P.(2d) 366; Texas & Pac. Ry. Co. v. Pottorff, 291 U. S. 245, 54 S. Ct. 416, 78 L. Ed. 777; Hamor v. Taylor-Rice Engineering Co. (C. C.) 84 F. 392. See, also, dicta in Bank of Orland v. Harlan, 188 Cal. 413, 206 P. 75; First National Bank v. Reed, 198 Cal. 252, 244 P. 368.
The findings negative negligence on the part of respondent in his dealings with Irwin and the bank. After examining a long line of California cases we have concluded that lack of negligence alone on the part of Camerer is not necessarily all that is required to resolve the equities of the case in his favor and against the Superintendent of Banks when representing creditors and depositors. In Moss v. Bowman, 116 Cal. App. 720, at page 727, 3 P.(2d) 377, 380, it is said: “‘In Shirey v. All Night and Day Bank, 166 Cal. 50, 134 P. 1001, the court said: “Where the true owner holds out another, or allows him to appear as the owner of or as having full power of disposition over the property, and innocent third parties are thus led into dealing with such apparent owner, they will be protected. Their rights in such cases do not depend upon the actual title or authority of the party with whom they deal directly, but are derived from the act of the real owner, which precludes him from disputing, as against them, the existence of the title or power, which through negligence, or mistaken confidence, he caused or allowed to appear to be vested in the party making the conveyance.” See Schultz v. McLean, 93 Cal. 329, 28 P. 1053; Gardiner v. McDonogh, 147 Cal. 313, 81 P. 964; Chucovich v. San Francisco Securities Corp., 60 Cal. App. 700, 214 P. 263.’ In the case of Powers v. Pacific Diesel Engine Co., 206 Cal. 334, 274 P. 512, 514, 73 A. L. R. 1398, it was said: ‘* * * that where the true owner clothes another with the indicia of ownership of property, and therefore the apparent authority to transfer title thereto, and innocent third parties are thereby led into dealing with such apparent owner, the true owner will be estopped to deny that the apparent authority is the real authority. Code Civ. Proc. § 1962, subd. 3. In such cases the equities are found to be in favor of the bona fide purchaser rather than in favor of the owner who has by his own conduct clothed another with the power to commit the fraud.”’ See, also, Smeade v. Rosen, 121 Cal. App. 79, 8 P.(2d) 507; Bank of America v. Universal Finance Co., 131 Cal. App. 116, 21 P.(2d) 147; Schumann-Heink & Co. v. U. S. National Bank, 108 Cal. App. 223, 291 P. 684, 686, 292 P. 547; Wenban Estate, Inc., v. Hewlett, 193 Cal. 675, 227 P. 723; Sidney v. Wilson, 67 Cal. App. 282, 227 P. 672; Otis Elevator Co. v. First National Bank, 163 Cal. 31, 124 P. 704, 41 L. R. A. (N. S.) 529; Maynard v. Firemen's Fund Ins. Co., 34 Cal. 48, 91 Am. Dec. 672; Bedell v. Herring, 77 Cal. 572, 20 P. 129, 11 Am. St. Rep. 307; Butters v. Brawley Star, 48 Cal. App. 57, 191 P. 987; Rapp v. Fred W. Hauger Motors Co., 77 Cal. App. 417, 246 P. 1067; Hollywood Holding, etc., Corp. v. Oswald, 119 Cal. App. 21, 5 P.(2d) 963.
When we measure the conduct of Camerer and Irwin by these rules, we are forced to the conclusion that through misplaced confidence in Irwin, Camerer put into his hands the power to commit the fraudulent acts we have detailed. The securities were made payable to bearer. Irwin had free and unlimited access to them. After they were wrongfully removed from the safe-deposit box by Irwin and “sold” and pledged, they again found their way back into the box and the possession of Camerer. He caused them to be delivered to Irwin, or “hired” to the bank as he expressed it, accepted compensation for their hire and security for their return. He was told that the bank expected to make a profit on the transactions. In accepting a compensation for the hire of the securities a reasonable man must have supposed that something would be done with them, other than letting them repose in the vaults of the bank, in order that a profit might be made over the interest they regularly earned. The facts of this case bring it well within the rule that where a person through misplaced confidence in another puts it in the power of the other to injure innocent third parties, he must bear the loss occasioned by the wrongful act of the party in whom he misplaced his confidence.
As far as this case is concerned the misconduct of the bank occurred with the misappropriation of the securities in September and December, 1929. The carelessness of Camerer did not antedate November 21, 1929, as to the first group of securities nor January 8, 1930, as to the second group. On these dates the securities had been returned to his possession. They were in his safe deposit box and their disposition was under his complete control. He received offers to “hire” them to the bank for a consideration. He accepted the offers and voluntarily gave the securities to Irwin to be used by the bank in such a way that it might make a profit out of them. He accepted security for their safe return to him and was paid the hire promised by the bank. He must or should have supposed that the bank expected to use the securities in some manner in trade or commerce in order to make a profit out of them. He was a stockholder in the bank, had confidence in it and its president, intrusted his securities, which were made payable to bearer, to it to be used in some manner so that the bank could profit from their use, accepted money for their use and security for their return. From the times Camerer delivered the possession of the securities to the bank that possession became legal. That they were used by the bank for a purpose not contemplated by Camerer at the times he gave possession does not make the possession unlawful nor the entire transaction void. Wenban Estate, Inc., v. Hewlett, supra. A somewhat similar situation was presented in the case of Schumann-Heink & Co. v. U. S. National Bank, supra, where a corporation entrusted a security to its secretary with the implied power of sale. The secretary pledged the security for the debt of another. In holding that the corporation was bound by the act of its secretary the court said: “It is, of course, the rule with certain exceptions that do not here concern us, that a mere thief can pass no title to that which he has stolen. The same thing is not necessarily true where he who wrongfully undertakes to deal with property has been, by the act or neglect of the true owner, clothed with the indicia of ownership. The law is, generally, that ‘where one of two innocent persons must suffer by the act of a third, he, by whose negligence it happened, must be the sufferer.’ Civ. Code, § 3543. In National Safe Deposit, Savings & Trust Co. v. Hibbs, 229 U. S. 391, 33 S. Ct. 818, 820, 57 L. Ed. 1241, it was said: ‘The qualification of the rule, as not applying when the instrument is stolen, is not based upon the name of the agent's crime, but upon the fact that, in the ordinary and typical case of theft, the owner has not intrusted the agent with the document, and therefore is not considered to have done enough to be estopped as against a purchaser in good faith. He certainly has not done enough if the estoppel is based upon the principle that when one of two innocent persons is to suffer, the sufferer should be the one whose confidence put into the hands of the wrongdoer the means of doing the wrong. But in a case like the present, the agent has been intrusted with the converted property, and it is totally immaterial whether, by a stretch which extends largely beyond the true field of trespass, his wrong has been brought within the criminal law or not. The ground of the estoppel is present and the estoppel arises. The distinction is not new. On the one side are cases like Knox v. Eden Mussee Americain Co., 148 N. Y. 441, 42 N. E. 988, 31 L. R. A. 779, 51 Am. St. Rep. 700, where an agent or servant simply had access to a document remaining in the possession of the owner; on the other, cases like Pennsylvania R. Co.'s Appeal, 86 Pa. 80, where possession is intrusted to the agent for one purpose and he uses it for another. It cannot matter in the latter class that the agent intended the fraud from the outset.”’
We granted a rehearing principally that we might consider the case of Verder v. American Loan Society (Cal. Sup.) 32 P.(2d) 1081, 1086, which had neither been cited nor considered at the time of our earlier decision. We have carefully studied this case and can find nothing in it to cause us to change our conclusions.
In the Verder Case the American Loan Society and the American Mortgage Company of California were separate corporations with interlocking officers and directors. On March 13, 1930, Mrs. Verder became the owner of a promissory note in the sum of $10,000 secured by a deed of trust and executed to a trustee with the mortgage company as beneficiary by A. W. Kundert and assigned to her without recourse. On January 12, 1931, on request of the mortgage company, Mrs. Verder delivered the note and deed of trust to it for collection. On January 15, 1931, the mortgage company delivered the note and deed of trust to the trustee which executed a reconveyance of the property. This was recorded on January 19, 1931. Prior to December 15, 1930, the loan society had paid over $400,000 to the mortgage company for the purchase of mortgages and deeds of trust, none of which had been delivered on that date. On that date Kundert made application to the loan society for a loan of $10,000 to be secured by a deed of trust on the identical property described in the deed of trust owned by Mrs. Verder. The loan was approved and the note and deed of trust were executed by Kundert and recorded on January 14, 1931, two days prior to the execution of the reconveyance, and five days prior to the recordation of the reconveyance under the deed of trust owned by Mrs. Verder. The mortgage company credited itself with $10,000 against the prior advancement of $400,000 by the loan society and credited Mrs. Verder with $10,000 on its books which was never paid her. Kundert defaulted on his note to the loan society and it acquired title to the property through foreclosure sale. Subsequently the mortgage company went into the hands of a federal receiver for the purpose of liquidation and the loan society into the hands of the state building and loan commissioner.
Mrs. Verder knew nothing of these transactions until after both corporations had become insolvent. She instituted her action against both corporations, the receiver, building and loan commissioner, and numerous individual defendants seeking to have the reconveyance cancelled and her deed of trust reinstated as a first lien upon the property. She was successful in the trial court and the state building and loan commissioner alone appealed from the judgment, which was affirmed by the Supreme Court.
It should be observed that the effect of the judgment was to restore the loan society to the same position in regard to its security that it occupied at the time it accepted its deed of trust. At that time that document was a second incumbrance on the property and subject to the lien of the deed of trust securing Mrs. Verder's note, which was subsequently released by the fraudulent acts of the officers of both companies. The judgment should certainly receive support because it restored the parties to the exact position they occupied before the fraud was committed and no one was injured by this action.
In deciding the Verder Case the Supreme Court announced the following rule: “‘It seems to be established by the weight of authority, that while an operating receiver takes the assets of a corporation subject to all equities outstanding against it, a liquidating receiver acts in the dual capacity of representing the corporation, as such, and also its creditors, and that in the latter capacity, he may claim rights and advance defenses, not available to the corporation. The authorities, however, do not extend this claim to include all cases where a loss will be sustained by creditors if a third party's claim is allowed against the insolvent, but only to include such cases as where the dealings of the insolvent were in fraud of the creditor's rights, or where the dealings in question were had directly between the third party claimant and the insolvent corporation.”’ (Italics ours.)
Under this rule we are required to reverse the judgment in the instant case. Both elements which the Supreme Court regards as necessary for the application of the general rule are present in the case before us. All of the dealings of Camerer were had with the bank. The trial court so held and there is ample evidence to support the finding. All Mrs. Verder's dealings were with the mortgage company, which did not appeal, and none of them were with the loan society, which did appeal. The dealings of the bank with Camerer's securities were in fraud of the rights of the creditors. The trial court held that: “The said defendant California Savings & Commercial Bank of San Diego by and through its duly authorized officers entered into the transactions above referred to for the purpose of deceiving and defrauding the State of California, its depositors and customers * * *.” There is ample evidence to support this finding. In the Verder Case there was no showing that the creditors of the loan society were injured by the fraud. As we have observed the judgment gave it the identical security it had when it accepted the Kundert note and deed of trust.
Camerer urges that the creditors of the bank were not injured by the manipulation of his securities because the bank parted with no money at the time it received them, and that the entire transaction consisted of entries in its books. However, by reason of the use of the Camerer securities the bank was able to keep open and transact business a number of months. After January 8, 1930, the bank paid to Irwin $54,000 to recompense him for some of the assets given the bank from the use of the securities of others. This represents a direct financial loss to the depositors and other creditors of the bank.
After careful study we have concluded that the Verder Case not only does not conflict with the conclusions we have here reached, but is authority supporting them. We may conclude with a paraphrased quotation from the case of Powers v. Pacific Diesel Engine Co., supra, as follows: Camerer was imposed upon and defrauded and of course had a cause of action against those who defrauded him. It may be assumed that such a right of action would be of doubtful fruition, but we may not be led to announce unsound principles of law because of the misfortune of respondent and our sympathies for him.
The judgment in so far as it affects appellants, is reversed.
We concur: BARNARD, P. J.; JENNINGS, J.