241 S.W. 608


TEAGUE INDEPENDENT SCHOOL DIST.
v.
FIRST STATE BANK OF TEAGUE et al.


(No. 8427.)


Court of Civil Appeals of Texas. Dallas.
March 11, 1922.
Rehearing Denied May 27, 1922.

Page 609

        Appeal from District Court, Freestone County; A. M. Blackman, Judge.

        Suit by the Teague Independent School District against the First State Bank of 
Teague and others. From judgment denying plaintiff relief as to the named and some of 
the unnamed defendants, the plaintiff appeals. Reversed and remanded in part, and 
affirmed in part.

        Boyd & Bell, of Teague, and J. N. Gallagher, of Austin, for appellant.

        Williford & Geppert and W. E. Doyle, all of Teague, C. S. Bradley, of Groesbeck, 
R. M. Edwards, of Fairfield, and Richard Mays and R. E. Prince, both of Corsicana, for 
appellees.

        BAKER, Special Judge.

        This suit was brought by Teague independent school district to recover 
approximately $30,000 of its school funds. The defendants consisted of certain official 
depositories of the funds, the sureties upon their several bonds, certain banks with whom 
portions of the funds were at one time deposited, and the administratrix of one of the 
bondsmen, who had died and whose estate was in process of administration.

        The existence of the trust funds, that they had been placed with the depositories in 
due course, that they had been in part redeposited by the depositories with the other banks 
which were sued, and that they had not been accounted for, was alleged and such 
allegations are not substantially disputed. The successive depositories and the successive 
groups of sureties upon the depository bonds deny their responsibility for the loss. The 
other banks allege that the funds which were deposited with them were not tagged as trust 
funds, but were simply deposits, subject to check, made by the depositors in the usual 
course of business, that they had been regularly checked out in the usual course of 
business, and that they are not responsible for them to the school district. It appeared that 
one of the depositories, Brazos Valley Investment Company, had become bankrupt, and 
accordingly its trustee in bankruptcy was joined as defendant. At one time the surviving 
widow, children, and heirs of the deceased bondsman were made defendants, but, when 
his administratrix was made party, the court dismissed the widow, children, and heirs 
from the suit, and no complaint is made here of that order.

        The case was submitted to the jury upon special issues. Upon the return of verdict 
the trial court rendered judgment that plaintiff recover from the bankrupt depository, 
Brazos Valley Investment Company, and its trustee in bankruptcy, S. E. Stratton, and that 
as to all of the other defendants plaintiff take nothing. From that judgment the school 
district has appealed to this court.

        The transcript, the statement of facts, and the special issues which were submitted to 
the jury are quite voluminous, but much of the record is not vital to the principles upon 
which in our opinion the appeal must be decided. The facts which are deemed essential 
will be set out in the opinion.

        Teague independent school district, for the scholastic year beginning September 1, 
1914, and ending August 31, 1915, designated Brazos Valley Investment Company the 
legal depository of the school funds of the district. On November 7, 1914, the investment 
company tendered, and the school district approved, its bond as such depository. The 
bond was in the sum of $20,000 and was conditioned as required by law. The sureties 
thereon were J. R. Bell, J. R. Chumney, E. B. St. Clair, and J. P. Ham. J. P. Ham is the 
deceased surety who is mentioned at the outset of this opinion, and whose estate is 
represented in this suit by Mrs. Allie Ham, administratrix. The parties to this suit call this 
bond the Ham bond.

        Shortly after August 31, 1915, Teague independent school district again designated 
the investment company as depository. The new designation was for the scholastic year 
beginning September 1, 1915, and ending August 31, 1916. On or about November 8, 
1915, the investment company tendered its bond for the new term. It appeared to be 
signed by E. J. Headlee, J. R. Bell, H. F. Gunter, J. R. Chumney, John F. Wallace, and W. 
L. Meier as sureties. In fact, the signatures of J. R. Bell, H. F. Gunter, John F. Wallace, 
and W. L. Meier were forged. The forgeries were not disclosed to the school district, 
however, until after the various transactions took place upon which the rights of the 
parties to this suit were fixed. The

Page 610

school district, in ignorance of the forgeries, approved the bond and transmitted it, as was 
customary, to the department of education at Austin. In a short time the department 
returned the bond to the school district, stating that, under a ruling of the Attorney 
General, Brazos Valley Investment Company could not legally qualify as depository of 
the school funds, it not being incorporated as a bank or trust company, but simply as an 
ordinary investment corporation. The school district then surrendered the bond to the 
investment company and informed it as to the ruling made by the Attorney General. The 
investment company acquiesced and accepted the surrender of the bond. This bond has 
been lost, and the parties to this suit refer to it as the lost bond.

        The school district then called for new bids, and in due course designated the First 
State Bank of Teague as depository (in place of the investment company) for the 
scholastic year beginning September 1, 1915, and ending August 31, 1916. On or about 
December 30, 1915, the bank tendered, and the district approved, its bond as such 
depository for the term mentioned. The bond was in the sum of $60,000, and was 
conditioned as required by law. The sureties thereon were J. R. Chumney, H. F. Gunter, 
R. W. Smith, J. D. Maupin, W. L. Meier, and E. J. Headlee.

        Shortly after August 31, 1916, the school district again designated the First State 
Bank of Teague as depository. The new designation covered the scholastic year 
beginning September 1, 1916, and ending August 31, 1917. The bank tendered, and the 
district approved, a new bond of the depository for the new term. It was conditioned as 
required by law. The sureties thereon were J. R. Chumney, Howard F. Hunter, J. D. 
Maupin, R. W. Smith, and E. J. Headlee.

        Shortly after August 31, 1917, the school district against designated the First State 
Bank of Teague as depository. The new designation was for the scholastic year beginning 
September 1, 1917, and ending August 31, 1918. The bank tendered, and the district 
approved, a new bond of the depository for the new term. The bond was conditioned as 
required by law. The sureties thereon were R. M. Thompson, J. D. Maupin, R. W. Smith, 
J. A. Thompson, and A. J. McKinney.

        The school funds which have not been accounted for came into the hands of the 
investment company as depository for such funds during the scholastic year beginning 
September 1, 1914, and ending August 31, 1915—the period covered by the Ham bond. 
The amount of the shortage, with interest to October 6, 1919, is fixed in the judgment in 
this case at $31,055.33. No question is raised here as to the correctness of this amount.

        When the First State Bank of Teague became depository of the school funds 
belonging to the school district, it entered into an agreement with the retiring depository, 
the investment company, whereby it gave time to the investment company in which to 
pay over to the bank, as school district depository, the balance of the school funds then 
remaining due by the investment company to the school district as retiring depository. As 
a part of the agreement in question, the investment company agreed to pay interest to the 
bank on such balance until the investment company should pay over such balance to the 
bank. The credit so extended was not for any definite period, and in virtue of its terms the 
balance was payable whenever the bank might make demand for it. In the agreement it 
was stipulated that the arrangement should be concealed from the school district. The 
arrangement was carried out. The investment company furnished to the bank memoranda 
statements of the balances in the divers accounts in which the depository carried the 
school funds. Some payments against these balances were made by the investment 
company to the bank in the early months of 1916, and in February of that year the bank 
paid to the investment company an overdraft due the investment company in one of the 
school fund accounts. Interest upon the balances was computed from time to time and 
paid by the investment company to the bank or debited by the bank against the 
investment company. The school district made no draft in favor of the bank nor the 
investment company for any of the trust funds, and the transactions between the 
investment company and the bank were upon the initiative of those institutions and 
without conference with or regard to the school district. The facts that the bank had not 
received the school funds from the investment company, but had made the loan and 
interest arrangements mentioned, were not known to the school district until long 
afterwards. The active officials of the bank were active officials and practically owners of 
the investment company at the time of the transactions in question.

        During September, 1916, H. F. Gunter, as cashier of the First State Bank of Teague, 
reported to the school district that the bank, as depository of the school funds, had then on 
hand approximately $32,000 of such funds. This statement was untrue. Such sum was 
sufficient to have included the funds covered by the arrangement between the bank and 
the investment company. No substantial change in the financial position of the 
investment company occurred between the date of the statements made by Gunter and the 
bankruptcy of the investment company, nor is it shown that the school district relied upon 
the Gunter representations or changed its position on account of them. Nor is it shown 
that the school district could have collected

Page 611

from the investment company, if it had then endeavored to do so.

        No express agreement was entered into between the investment company and the 
bank at or after the time the bank became depository to the effect that the bank would 
account to the school district for the balances owing by the investment company as 
retiring depository.

        We are of opinion that the lost bond has no vital bearing upon the legal principles 
upon which this case must be decided. The act of the principal in that instrument in 
tendering to the school district an obligation carrying the forged signatures of important 
sureties thereon was a fraud upon the school district. The act of the district in accepting 
and approving the bond was not binding upon it, for it was induced by the fraud of the 
investment company and was based upon a mistake of fact. We are also of the opinion 
that the investment company was not legally authorized under its charter and the 
controlling provisions of the depository law to qualify as depository and the ruling of the 
department of education pursuant to the opinion of the Attorney General that the 
investment company was ineligible was correct. The judgment of the trial court 
discharging the sureties upon the lost bond was correct and should be affirmed.

        We are of opinion that no estoppel against the bank can be predicated upon the 
misrepresentations made by its cashier, Gunter, in September, 1916, to the effect that the 
bank then had on hand as depository funds belonging to the school district in amount 
sufficient to cover the missing funds. We hold that Gunter had implied authority to bind 
the bank, in virtue of his office and in virtue of the fact that it was part of his duty to keep 
track of the school district accounts and to make reports concerning and speak for the 
bank with reference to same to the school district from time to time, but some of the 
requisite elements of estoppel are absent from the case. The misrepresentations were not 
acted upon by the school district, its position was not changed, and it suffered no loss on 
account of, or prejudice from, such misrepresentations.

        No liability against the principal and sureties under the bonds of date October 17, 
1916, or September 21, 1917, is shown, and the judgment of the trial court discharging 
the makers of those bonds should be affirmed.

        No liability is shown against the banks other than the First State Bank of Teague 
which were sued on the theory that one of the depositories kept with them at one time 
certain of the trust funds, and the judgment of the trial court in their favor should be 
affirmed.

        We are of opinion, however, that the disposition made of the case as between the 
plaintiff, on the one hand, and the investment company, its trustee in bankruptcy, its 
sureties on the Ham bond, the First State Bank of Teague, and its sureties on the bond of 
December 30, 1915, is erroneous.

        Under the provisions of the Ham bond and the statutes which control the 
relationship between the school district and depositories of school funds, the investment 
company and the sureties upon the Ham bond became and remained liable to the school 
district for the safe-keeping and proper and actual paying over of the school funds until 
the investment company actually accounted for such funds to the school district or the 
new depository. Such responsibility could not be discharged through any arrangement, 
not equivalent to payment, made between the retiring depository and the new depository. 
So far as the responsibility to the school district of the investment company and its 
sureties is concerned, the case stands as if the secret arrangement which was made 
between the investment company and the bank about December 30, 1915, was never 
entered into nor performed, unless such secret arrangement is in law equivalent to 
payment by the investment company to the new depository. A depository of public funds 
cannot relieve itself of any portion of its duty safely to keep and properly to account for 
such funds, by making some unauthorized arrangement with some one other than the 
legal and responsible owners of the funds. If, however, the arrangement was equivalent to 
payment, the investment company and its bondsmen would be absolved unless they 
should be held by virtue of and through the very arrangement which was entered into. 
The arrangement, in other words, might be one which itself evidenced anew the 
obligations of the investment company and its sureties. In view of another trial, we deem 
it proper to say that in our opinion the facts proven and found at the former trial with 
reference to the arrangement made between the two depositories were equivalent to proof 
of the actual paying over of the school funds to the new depository. Whether the 
arrangement itself was one through which the school district could reach the investment 
company and its sureties we will not decide, for the question is not presented and has not 
been briefed or argued on this appeal.

        The effect of the arrangement between the two depositories upon the liability of the 
First State Bank and its sureties to the plaintiff school district is quite far-reaching. As 
between the investment company and the bank, the arrangement was equivalent to the 
actual payment by the investment company to the bank of the missing funds, and the 
immediate and contemporaneous loan of those funds by the bank to the investment 
company. The result is that the bank made itself and its sureties responsible to the

Page 612

school district for the missing funds, even though no express contract was made between 
the bank and the investment company that it would so become responsible.

        When the bank qualified as depository, it secured to itself the right to loan the school 
funds for its own profit, and it and its sureties undertook to account for the funds, 
regardless of the manner in which the bank might use the funds and regardless of the 
results which the bank might obtain for itself in its use of the funds. The bank acquired 
the right to loan the funds as it might choose to loan them and assumed all of the risks of 
losses under loans it might make out of such funds. It acquired the right to determine in 
what quarters and how it would use them and in what amounts and upon what terms it 
would use them. It had the right to loan the funds to the investment company upon such 
obligations of the investment company as were satisfactory to it, whether such 
obligations were written or verbal, and, if written, whether in conventional form or 
merely memoranda. When it entered into contract with the investment company whereby 
it affirmatively permitted the investment company to keep the funds which were then 
immediately payable upon terms when agreed upon as to interest, as to maturities and as 
to repayment, the transaction was in substance a loan.

        Certain angles of the principles which control the liability of the investment 
company and its sureties on the Ham bond are discussed in the case of Hall County v. 
Thomssen, 63 Neb. 787, 89 N. W. 393. That case was an action upon the bond of 
William Thomssen as treasurer of Hall county to recover, among other shortages, a 
certain sum of $10,000. This sum had been deposited by Thomssen's predecessor in the 
bank of Commerce of Grand Island, which bank had become a lawful depository for 
county funds by giving statutory bond therefor to the county. When Thomssen's 
predecessor retired, he gave Thomssen checks upon the Bank of Commerce for the 
deposit in question. Thomssen, instead of withdrawing the funds in cash, presented the 
checks to the bank and had them certified, but did not otherwise disturb the funds. Within 
a few weeks thereafter the bank failed. The county sought to hold Thomssen and his 
bondsmen liable for the loss upon the theory that Thomssen's action in having the checks 
certified operated to withdraw the depository moneys and to create the direct relationship 
of debtor and creditor between himself and the depository bank, and that in consequence 
thereof the county had no recourse on the bank's depository bond, but did have recourse 
against Thomssen and his bondsmen. The court say:

        "By the terms of the statute under which the Bank of Commerce became a 
depository, and by the terms of the bond which it was required to give, after receiving 
money of the county it would remain a depository of those moneys indefinitely, or until 
the money was duly paid out on the check of the treasurer, and the only way it could 
cease to be a depository would be by surrendering and paying over to the proper 
authorities all moneys in its hands which had been received by it as such depository. It is 
very clear that in this case no such paying over of the funds on deposit has ever been 
made by the bank."

        Certain angles of the principles which control the liability of the bank and its 
sureties on the December 30, 1915, bond are discussed in the case of Trumpbour v. 
Trumpbour, 70 Hun, 571, 24 N. Y. Supp. 212, affirmed by New York Court of Appeals, 
144 N. Y. 652, 39 N. E. 494. In that case it was shown that the New York Life Insurance 
& Trust Company, after undertaking safely to keep, invest, and pay interest upon certain 
trust funds which it was directed under an order of court to apply for and receive from the 
Farmers' National Bank of Hudson, for some reason failed, omitted, or neglected to 
demand or receive such funds from the other bank. Upon suit brought against the trust 
company for the funds, with their earnings, its answer was that it never received the 
funds, and hence should not account either for the funds or any earnings upon the same. 
The court say:

        "Now, while it is true that it did not receive in fact a deposit of cash or a check or 
draft, it received what, under the circumstances, was the equivalent of a check or draft, 
and it is only by its own neglect or omission that it failed to realize upon it, as it could 
upon a check or draft where there was money on deposit to the credit of the person 
drawing such check or draft. The fund in question was in the possession, and under the 
control of, the court, and deposited for the time being in the Farmers' National Bank of 
Hudson. The court did not pay cash or draw checks or drafts, but makes and directs 
payments by its orders. In this case it directed the transfer of the money in its possession 
from, and its payment by, the Farmers' National Bank of Hudson to the New York Life 
Insurance & Trust Company by its order, which took the place of a check or draft of an 
individual or corporate drawer. That order was given to and left with the New York Life 
Insurance and Trust Company, such company in no wise refusing to accept the same, but 
agreeing to take the money therein mentioned, and to pay interest upon it as prescribed by 
its terms. This, I think, was a complete acceptance of the trust which it was authorized to 
receive and execute under its charter, and * * * it must be held to possess the money 
mentioned in the order, subject to an order of this court. If it does not in fact possess it, it 
is by reason of its own omission and neglect, and it is responsible for it and its increase to 
the court and those for whom it was to hold it in trust, just the same as if it had drawn it 
from the Hudson Bank."

Page 613

        We do not think, even if it be shown that the school district knew of the credit 
arrangement between the bank and the investment company, that such knowledge would 
have any particular bearing upon the rights of the parties. The jury's findings with 
reference to such knowledge vel non are in apparent conflict, though we think the 
appearance of conflict largely disappears when the findings are closely analyzed. The 
findings, on the one hand, are in substance that the credit arrangement was concealed 
from the school district, and, on the other hand, that the school district knew that the 
investment company had not paid over the funds to the bank. Both findings might be true, 
but it is our view of the record that the facts proven and found established that the school 
district did not know of the credit arrangement between the bank and the investment 
company, and, if we regarded the matter of knowledge as of controlling importance, we 
would proceed upon the assumption that the school district did not possess such 
knowledge.

        It is urged on behalf of the bank that the credit it extended to the investment 
company ought not to be regarded as a loan because the amount involved was in excess 
of the sum the bank could lawfully loan to a single customer. Such fact, if true, does not 
affect the case. A bank may make an excess loan and may compel the borrower to repay 
it according to its terms. The penalty for the illegal act does not destroy the loan itself. 
The incidence of the penalty is elsewhere.

        It is urged that the bank owed the school district no duty actively to collect the 
school funds from the retiring depository, that it was the duty of the school district to 
draw warrant or make draft against the retiring depository in favor of the new depository, 
and thus or otherwise actually see that the funds were transferred, and that, until the 
school district itself brought about the actual transfer of the funds, the liability of the bank 
and the sureties upon its bond of December 30, 1915, did not begin. These views cannot 
be maintained and applied in this case, even though they might be abstractly correct. The 
relationship between the two depositories was very intimate. The executives of the bank 
owned and operated the investment company. The school funds normally were kept by 
the investment company in the bank. When the bank qualified as depository, it 
immediately assumed control of the school funds accounts, and, without waiting for any 
warrant, draft, or order from the school district, took over certain of the funds, made the 
credit arrangement with the investment company, which has been elsewhere described, 
settled the overdraft claimed by the investment company in one of the accounts, began 
earning and receiving interest on the delayed balances, agreed with the investment 
company to conceal from the school district the fact that the balances were being 
withheld by the investment company, and in every practicable way became the active 
depository of the school district and the apparent custodian of all of the school funds.

        It is urged by certain of the sureties under the Ham bond that their general demurrer 
to plaintiff's pleadings should have been sustained in view of the alleged inconsistencies 
and uncertainties in the pleadings in setting forth the liabilities to plaintiff of the divers 
parties. The pleadings are not entirely satisfactory, the issues are not stated with that 
directness and steadiness which is desirable, but, in view of the disposition which we 
shall make of this appeal, the defects in the pleadings will doubtless be corrected before 
the retrial of the case. The briefs present numerous other questions, most of which 
become immaterial in view of the principles of law upon which this decision rests. So far 
as they are material, they will doubtless not arise on the retrial of the case, and we will 
not extend this opinion further to discuss questions which either are, or may become, 
abstract.

        It is urged that the school district is estopped from proceeding against the First State 
Bank of Teague and its sureties, because the school district, after the collapse and 
bankruptcy of the investment company, proved up claim in bankruptcy against that 
company for the amount of its losses, which form the basis for this suit, and because it 
has received, and still retains, certain money paid it as a dividend upon such claim in 
bankruptcy. We cannot sustain this contention. The facts were not such as to present to 
the school district the duty of electing between inconsistent rights and remedies. In fact, 
the course taken by the school district which is complained of worked to the advantage of 
all of the other defendants, as well as to the advantage of the school district, for any 
dividend the school district may obtain through its claim against the bankrupt will reduce 
its claim against the other defendants.

        Numerous issues were submitted to the jury. Its findings upon some of these issues 
are inconsistent and contradictory, indicating either a want of understanding of the issues 
and the evidence or some degree of passion and prejudice. In view of these facts, the 
errors we have already discussed, the imperfect state of the pleadings, and the obvious 
fact that the case was tried, in part at least, upon erroneous theories, call for the reversal 
in part of the judgment of the trial court and the remand of the cause in part for further 
proceedings, rather than that this court shall finally render judgment on this appeal.

Page 614

        Accordingly the judgment of the trial court with respect to the controversies in this 
cause between the plaintiff, Teague independent school district, on the one hand, and the 
defendants, the sureties on the Ham bond, the administratrix of J. R. Ham, deceased, the 
First State Bank of Teague, and the sureties upon its bond of December 30, 1915, will be 
reversed, and remanded to the trial court for further proceedings in accordance with this 
opinion, but as to all other parties its judgment will be affirmed; and it is so ordered.