Opinion
August 18, 1925.
APPEAL from the District Court of the Fifth Judicial District for Bannock County. Hon. B.S. Varian, Presiding Judge.
Action to recover on depositary bond which defendants had signed as sureties. Judgment for plaintiff affirmed on original hearing. Affirmed in part and reversed in part on rehearing.
B.W. Davis and Frank T. Wyman, for Respondents, file no brief on rehearing.
T.C. Coffin, for Appellants, Lila Franklin, Executrix, and Clarence E. Franklin, Executor.
If the public officer did not have the authority and power in the first instance to do the act which he sought to do or to make the contract which he sought to make, then that act and that contract cannot be ratified, and the municipality or other political subdivision whom the officer sought to represent cannot be bound thereby. (22 R. C. L., p. 460, sec. 122.)
A general deposit creates the relationship of debtor and creditor. It is a relationship established by a civil, legal contract cognizable in a court of law and enforceable in a court of law. By the creation of such relationship the title to the money deposited passes from the depositor to the depositary. ( State v. Thum, 6 Idaho 323, 328, 55 P. 858; National Bank of the Republic v. Millard, 10 Wall. (77 U.S.) 152, 19 L. ed. 897, 899.)
A certificate of deposit is not a special deposit within the meaning of subd. 4 of C. S., sec. 8379. (1 Morse on Banks and Banking, 5th ed., sees. 297-309, pp. 562-581.)
A special deposit is "A deposit for safekeeping to be returned intact on demand, or for some specific purpose not contemplating a credit on general deposit." (3 R. C. L. 517; 1 Morse on Banks and Banking, 5th ed., sec. 183; 7 C. J. 630.)
A special deposit is in the nature of a bailment. The relationship of bailor and bailee is a purely legal relationship and a breach of the duties imposed by that relationship confers no jurisdiction whatever upon a court of equity. ( Young v. Mercantile Trust Co., 140 Fed. 61; affirmed in 145 Fed. 39, 75 C.C.A. 264.)
An unauthorized or unlawful deposit of public funds in a bank does not create a special deposit. Such unauthorized, and therefore unlawful, action gives rise to a trust ex maleficio. The bank being charged with notice of the officer's authority receives the money not on contract but charged with a trust. (C. S., sec. 8379; Myers v. Board of Education, 51 Kan. 87, 37 Am. St. 263, 32 P. 658; State v. Midland State Bank, 52 Neb. 1, 66 Am. St. 484, 71 N.W. 1011; State v. Thum, 6 Idaho 323, 55 Pac. 858; Board v. Wilkinson, 119 Mich. 655, 78 N.W. 893, 44 L.R.A. 493; San Diego County v. California Nat. Bank, 52 Fed. 59; Independent School Dist. v. King, 80 Iowa, 497, 45 N.W. 908; Watts v. Cleveland, 21 Okl. 231, 95 P. 771, 16 L.R.A., N.S., 918; First National Bank v. Bunting Co., 7 Idaho 27, 59 P. 929, 1106; Yellowstowe County v. First Trust Sav. Bank, 46 Mont. 439, 128 P. 596; Franklin Nat. Bank v. The City of Newark, 96 Ohio St. 453, 118 N.E. 117; Page County v. Rose, 130 Iowa, 296, 106 N.W. 744, 5 L.R.A., N.S., 886; Board of Commrs. v. Strawn, 157 Fed. 49, 84 C.C.A. 553, 15 L.R.A., N.S., 1100.)
O.O. Haga and H.B. Thompson, for Appellants.
The defendants merely bound themselves to repay public funds deposited in a bank that was in no sense an official bank or an official depositary under the statutes having certain public duties to perform by reason of the deposit. ( Illinois Surety Co. v. United States, 226 Fed. 665, 141 C.C.A. 421.)
"It follows that the relation between the depositary and the county is that of debtor and creditor; that the depositary does not occupy the relation of a public officer having charge of public funds, which he may not use, and that the bond in suit is not, in a strict sense, an official bond." ( Henry County v. Salmon, 201 Mo. 136, 163, 100 S.W. 20; Barrett v. Stoddard County, 246 Mo. 501, 511, 152 S.W. 43; Brown v. Wyandotte Co., 58 Kan. 672, 50 P. 888; Colquitt v. Simpson Ledbetter, 72 Ga. 501.)
On January 23, 1925, a petition for rehearing was granted, and thereafter a reargument was had and the case again resubmitted. We have carefully re-examined the record and have reached the conclusion that the former opinion is correct in so far as it affects the liability of the appellant bondsmen for the moneys held by the Bannock National Bank on general deposit, viz.: the sum of $42,335.04. We will consider whether the obligation of the bond extends to a time deposit of $32,000 waterworks fund money made by the city treasurer March 26, 1919, evidenced by a time certificate of deposit issued by the bank on that date and renewed by succeeding city treasurers.
The depositary bond signed by the principal and sureties on July 7, 1915, contains the following conditions; "Now, therefore, if said Bannock National Bank shall at the beginning of each and every month (1) render to the city treasurer and city clerk a statement in duplicate showing the daily balance of the monies of the city of Pocatello held by it during the month next preceding and the interest thereof, and (2) shall well and truly keep all sums of money so deposited or to be deposited, as aforesaid, and the interest thereon subject at all times to the check and order of the city treasurer of said city of Pocatello, as aforesaid, and (3) shall pay over the same and any part thereof, upon the check or written demand of said city treasurer, and to her successor in office as shall be by her demanded, and (4) shall calculate, credit and pay said interest, as aforesaid, and shall in all respects save and keep the city of Pocatello, Idaho, and the treasurer thereof harmless and indemnified for and by reason of making such deposit or deposits, then this obligation shall be void and of no effect, otherwise to remain in full force and virtue."
On July 26, 1915, an ordinance was passed by the city of Pocatello, designating certain banks then doing business in said city as depositaries for all funds of the city of Pocatello. The ordinance provides that there shall be charged to the said banks designated as depositaries interest at the rate of three per cent per annum, payable quarterly to the said city on the average daily balances of the moneys of the city held in said banks, which said interest shall be credited quarterly to the account of said city of Pocatello. It requires that each bank shall render to the city treasurer and city clerk a statement in duplicate showing each day's balance of all funds belonging to the city and held in said banks, together with the interest thereon, for the month within which the statement is rendered. It stipulates that all deposits shall be subject to increase or decrease as shall be determined by the city treasurer, and the banks shall pay par value for any draft or warrant drawn by the city treasurer at date of maturity, provided there are sufficient funds on deposit belonging to said city to meet the draft or warrant. This ordinance further directs the city treasurer to deposit in equal and like proportion any and all funds in her possession or under her control and belonging to the city, or any funds which may come under her control, with the banks named in the ordinance, in like amount, upon the passage of the ordinance and the execution by the banks of the bonds therein specified, to make future deposits in like proportion and that she shall check on said banks in like proportion, and keep as nearly as practicable at all times an equal division of the funds in said banks. The ordinance then requires that each bank therein named shall give to the City of Pocatello a bond in the penal sum of not less than $50,000 to be approved by the council, which bond shall be conditioned upon the payment of interest and the full and faithful performance of the trust imposed by the ordinance. The bond of July 7, 1915, before referred to, was the bond furnished by the Bannock National Bank as one of the designated depositaries, and is the bond upon which this suit is brought. The trial court found, upon sufficient evidence, that the bond was accepted and approved by the city council at a meeting held July 29, 1915.
On February 7, 1918, there was passed by the council and on February 12, 1918, approved by the mayor of the City of Pocatello, an ordinance re-enacting the provisions of the ordinance of July 26, 1915, before referred to, but adding the provision that there might be deposited equally in the depositary banks on time deposit such amounts of money as should be determined upon by the finance committee of the city council, which said sums so deposited should draw interest at the rate of four per cent per annum, credited quarterly, and be withdrawn only upon the signatures of the city treasurer and two members of the finance committee of the council.
On March 26, 1919, the city treasurer, presumably under such authority as the revised ordinance gave, by check signed by herself and countersigned by the mayor, withdrew from the Bannock National Bank $32,000 of waterworks fund money then on general deposit, and deposited the same amount on time deposit in that bank, taking therefor a time certificate of deposit bearing four per cent interest per annum. This certificate of deposit was renewed by succeeding city treasurers and was outstanding when the bank suspended business on May 13, 1921. It is stipulated that the records of the city treasurer show that a check dated March 26, 1919, upon the Bannock National Bank, in the sum of $32,000 was drawn by the city treasurer and countersigned by the mayor; that such check was duly cashed by said bank, and that a time certificate of deposit was issued for the money so taken out of the general deposit.
The question that confronts us, one that has given more than usual concern, is: "Did the obligation of the bond extend to that portion of the city funds represented by the time certificate?"
The ordinance of July 26, 1915, upon which the city relies, was passed and such selection and designation of the depositary bank was made by authority of Session Laws 1893, page 97, sec. 65, re-enacted as Session Laws 1899, page 192, sec. 69, and continued by the codifier as R. C., sec. 2261, and C. L., sec. 2261, which statute provided that "the treasurer may be required to keep all moneys in his hands belonging to the corporation in such place or places of deposit as may be provided by ordinance, but no such ordinance shall be passed by which the custody of such money shall be taken from the treasurer and deposited elsewhere than in some regularly organized bank, nor without a bond to be taken from such bank in such penal sum and with such security as the council or board of trustees shall direct and approve sufficient to save the corporation from any loss, but such penal sum shall not be less than the estimated receipts for the current year from taxes and special assessments levied and to be levied by the corporation." The enactment of a depositary law has generally been held to be a consent to the relation of creditor and debtor between the municipality and the bank, and it may safely be taken that this statute at the very least authorized a general deposit. ( State v. Lowdermilk, 23 Ariz. 574, 205 Pac. 915; Lawson v. Baker, (Tex. Civ.), 220 S.W. 260; Henry County v. Salmon, 201 Mo. 136, 100 S.W. 20; Cadwell v. King, 84 Iowa, 228, 50 N.W. 975; State v. Bartley, 39 Neb. 353, 58 N.W. 172, 23 L.R.A. 67.) And it is not unlawful for the municipality to require that the depositary pay interest. ( Mayor of New York v. National Broadway Bank, 126 N.Y. 655, 27 N.E. 555; National Surety Co. v. McCormick, 268 Fed. 185; McCormick v. Hopkins, 287 Ill. 66, 122 N.E. 151.) The subject matter of the ordinance of July 26, 1915, was accordingly within the legislative power of the city.
The statute quoted remained the law until Session Laws 1919, chap. 105, effective May 8, 1919, amended it by a minor change in the language and by the addition of the proviso that "the treasurer may be directed and empowered by ordinance, to invest any money in his hands in securities of the United States government, or of the state of Idaho, county bonds, highway bonds, or in local improvement bonds of the city or village for which he is treasurer." This amendment was the first express authority to a municipality to invest any of its moneys, but we do not believe that its enactment was a realization by the legislature for the first time that municipalities had moneys in the nature of sinking funds accumulating for future liabilities, and accordingly a provision whereby they might earn interest, but rather was a response to a request of the federal government for the purpose of expressly authorizing investment in bonds of the Liberty loan and like issues, to which authority was annexed other provisions so that the statute might not be a temporary one only.
That a time deposit, equally with a general deposit, is a true deposit is upheld by general banking practice and by the cases of National Surety Co. v. McCormick and McCormick v. Hopkins, supra. These cases hold that authority to deposit is authority to make a time deposit. The statute of 1893 placed no limitation on the kind of a deposit a municipality could make thereunder; we add no limitation. We are of the opinion that the legislature must have known that sinking funds for the retirement of the bonds authorized by Laws 1891, page 53, would accumulate in the municipal treasury, that such funds ought to earn interest, and therefore left cities and villages free to contract for the payment of interest by the banks. We think the municipality was authorized to make the best bargain it could in the way of interest on its moneys, and had the power, consistent with its financial requirements, under protection of proper bond, to consent to conditions of repayment such as would be implied from the placing of moneys on time deposit, and we therefore hold that in the instant case the city had authority to place its money on time deposit if properly secured. As a matter of practice, that has been the construction placed upon the statute by municipalities throughout the state.
By the passage of the ordinance of July 26, 1915, the city offered to deposit on general deposit in equal and like proportion in the banks named, any and all funds in the possession of the city treasurer, or which might come into her possession or under her control and belonging to the city, upon each bank furnishing a bond satisfactory to the city, conditioned in the penal sum and as required by the ordinance. The Bannock National Bank furnished the bond of July 7, 1915, conditioned as required by the ordinance that the bank should pay interest at the rate specified in the ordinance and pay over the principal and interest "upon the check or written demand of said city treasurer, and to her successors in office as shall be by her demanded," and upon the bank complying with those conditions then the "obligation to be void and of no effect." Upon the approval of such bond and the deposit of the city's moneys in the Bannock National Bank there then existed a contract between the city and the sureties, the terms of which were stated by the ordinance and bond. The sureties then became obligated for the faithful and full performance by the bank of the contract as contained in the ordinance and bond, and by these instruments properly construed, are the sureties bound.
In United States Fidelity Guaranty Co. v. Board of Commrs. of Woodson County, 145 Fed. 144, 76 C.C.A. 114, 4 rule that is perhaps without exception to-day as to sureties not for hire is stated as follows: "A surety is a favorite of the law, and never liable beyond the strict terms of his obligation. But his contract is, nevertheless, but an agreement, and, like all other agreements, it must have a just and rational interpretation. The actual intent and meaning of the parties when the agreement was made, deduced from the entire contract, from its subject matter, from the purpose of its execution, and from the situation and circumstances of the parties when they made it" will govern its interpretation. The language of the contract in the present instance and the actual intent and meaning of the parties at the time they entered into it all point to the same thing, viz.: that the city intended a general deposit in the depositary bank payable on demand, and the receipt of a certain rate of interest on average daily balances, and that the sureties intended to assume an obligation for the payment on demand of such general deposit with the accrued interest. Had that remained the situation at all times from July, 1915, on, there would now be no question for the decision of this court. But the city on February 12, 1918, by ordinance provided that moneys of the city might be deposited on time deposit, to bear interest at the rate of four per cent per annum. That this was a material amendment of the ordinance of July 26, 1915, and therefore a material change in the contract of the sureties must be conceded. In the case of Magee v. Manhattan Life Ins. Co., 92 U.S. 93, 23 L. ed. 699, the court uses the following language: "A surety is a 'favored debtor.' His rights are strictly guarded, both in law and in equity. The slightest fraud on the part of the creditor touching the contract annuls it. Any alteration after it is made, even though beneficial to the surety, has the same effect. His contract, exactly as made, is the measure of his liability, and if the case against him is not clearly within it, he is entitled to go acquit." It is an almost universal rule that sureties not for hire "are never held liable beyond the clear and absolute terms and meaning of their undertakings; the liability of a surety is not to be extended by implication." ( Miller v. Stewart, 9 Wheat. 680, 6 L. ed. 189; Martin v. Thomas, 24 How. 315, 16 L. ed. 689.) The present case is not one where a strict depositary law permitting but one kind of deposit is to be read into the contract, but a case where the amended ordinance permits two kinds of deposit, while the former ordinance under which the bond was given, together with the bond, refers to but one kind of deposit. We will not say that sureties not for hire are liable under any and all circumstances for moneys deposited in the depositary bank, nor will we stretch their obligation beyond that which they voluntarily assumed, and we therefore hold that the bond sued on did not cover time deposits.
In the present instance the amended ordinance of February 12, 1918, was authority for the withdrawal of money from the amount on general deposit in the Bannock National Bank. It was also authority for the city treasurer to place that money on time deposit had there been any bond furnished that would cover time deposits. The $32,000 was lawfully in the hands of the treasurer upon its withdrawal from the general deposit. There was a municipal depositary law or ordinance permitting both a general and a special deposit; there was a designation of a depositary for such time deposits but no qualification by the depositary for such time deposits, in that a bond had not been furnished and accepted that would cover such deposits, and there was a state law authorizing only special deposits where no depositary bond is given. Under the circumstances the treasurer should have redeposited the money on general deposit, to the extent that the depositary bond would cover, and place any excess on special deposit. This she did not do, and the time deposit must be deemed to be a deposit made without the protection of any bond whatever. If we held otherwise we should virtually rule that under every circumstance a depositary bond covers any kind of deposit in the depositary bank regardless of the terms of the bond and of the depositary law. The facts in this case differ from those in Blaine County v. Fuld, 31 Idaho 358, 171 P. 1138, in that the treasurer here had the lawful custody of the funds upon withdrawal, could thereafter lawfully make both a general and a special deposit, and had the general authority to make a time deposit had there been any qualification by the depositary.
We accordingly hold that the time deposit of $32,000 waterworks fund money is not within the undertaking of the sureties upon the bond in suit; that the bank never acquired title to this money, and that the city's right to recover the $32,000 does not exist as against appellant sureties.
The cause should therefore be remanded, with directions to the court below to modify its judgment in accordance with the views herein expressed, and it is so ordered. No costs are awarded upon this appeal.
Babcock, District Judge, concurs.
The original opinion on this appeal was written by Adair, District Judge, sitting as a member of the court. It was concurred in by all members of the court then sitting. I think it is a clear discussion of the questions presented by the record and in the main I adhere to the views therein expressed. However, because there has remained some doubt about appellants being liable under the terms of the surety bond for the $32,000 included in the time certificate, and because of the importance of the question relating to the investment of public funds in this manner, it has been deemed advisable to grant a rehearing and give further consideration to the case.
That opinion, among other things, holds that a city has only such powers as are expressly conferred by charter or by statute, and such as are clearly implied for the carrying out of its powers expressly granted; that a city must keep its funds on general deposit and invest them only as authorized by law and cannot dispose of or keep its funds in any other manner; that the taking of a time certificate of deposit for city funds already on deposit and protected by the depositary bond, is an unauthorized investment. I agree with the law as thus announced in the original opinion. Upon rehearing counsel for appellants appear to have presented their argument solely upon the theory that the court would adhere to this view. That it is so held cannot be questioned and respondent's counsel in their supplemental brief seem to concede its correctness, for they say when certain officers of the city arranged with the official depositary to change the manner in which the latter should hold the $32,000 of the city's funds, then on general deposit, so that thereafter such funds should be held on a time certificate, "all of these officers including the official depositary knew as a matter of law that the act was strictly forbidden by the statutes of this state. They knew as they were bound to know that this act might not lawfully be done."
Again on the trial of the cause below, when appellants sought to introduce the ordinance authorizing this change to a time deposit, respondent's counsel made the objection that "the city of Pocatello could not lawfully pass an ordinance containing the subject matter contained in this ordinance." Not only because all of the eminent counsel on both sides take this view, but also because a proper construction of the statute makes it so, there is no reason to doubt that the city is without authority to make a time deposit in any bank and that its attempt to do so, was in violation of law and the title to this $32,000 did not pass from the city to the bank.
If the investment of this money in a time certificate of the Bannock National Bank was "strictly forbidden by the statutes of this state," that is, if it was an unauthorized investment, title to the same could not have passed from the city to the bank under the long-established rule first declared in State v. Thum, 6 Idaho 323, 55 P. 858, and again in First Nat. Bank v. C. Bunting Co., 7 Idaho 27, 59 Pac. 929, 1106, and in numerous cases that have since followed that rule. I think the rule of these cases is based upon a sound public policy and that a departure from it might lead to serious consequences against public interests and that the judgment in this case must be modified to the extent of holding that the $32,000 invested in a time certificate by the City of Pocatello in the Bannock National Bank, at the time of its failure, is not within the terms of the depositary bond, and the defendants in this action are not liable for this money.
I think it must be conceded, under C. S., sec. 4046, that the officials of the City of Pocatello were without any authority to withdraw this $32,000 from the Bannock National Bank, where it was on general deposit protected by the depositary bond, subject to payment upon demand with three per cent interest on the daily balances, and invest the same in a time certificate of deposit drawing four per cent interest. Such action is clearly contrary to the provisions of this statute and to the conditions of the depositary bond. The clause, "and shall well and truly keep all sums of money so deposited or to be deposited, as aforesaid," cannot by any judicial construction, be extended to any other class of deposits than that contemplated by the bond and authorized by law. If the city must keep its funds on general deposit or invest them only as authorized by law and cannot dispose of or keep its funds in any other manner, it cannot withdraw them from general deposit and invest such funds in the purchase of a time deposit and still hold the bondsmen liable. This would be tantamount to saying that the city, acting in violation of the Criminal Code in conjunction with the bank, may alter the conditions of the depositary bond without the knowledge or consent of the sureties.
C. S., sec. 8379, defines crimes against the revenue and property of the state. Subdivision four makes it a felony punishable for from one to ten years and disqualifies an officer doing so from ever holding any office in this state, for such officer to deposit public money in a bank or with any banker or other person otherwise than on special deposit, or as otherwise authorized by law. A public official cannot create a contractual liability for the recovery of public money deposited in violation of the criminal statute referred to.
It is agreed that the city treasurer, acting under the mandate of a city ordinance, as such official drew her check against this $32,000 that was in the bank upon lawful deposit. She thereafter loaned this amount on a time certificate to the Bannock National Bank. If it were conceded that this was done merely by a bookkeeping transaction, whereby the bank upon the demand of the city officials, transferred this amount of city funds from a lawful deposit to an unlawful investment, it would not legalize the transaction.
When the treasurer drew her check for this $32,000 and the same was honored, the liability of the obligors on the depositary bond would be to that extent canceled. It was her duty to demand and receive payment only in lawful money. The bank was then a going concern and presumably able to meet its obligations. Her act in drawing this check against the city's general account was a perfectly legal transaction. Her subsequent act in investing the proceeds of this check in a time certificate of deposit of this bank, was an unauthorized and unlawful act that made her liable on her official bond. No duty rested upon the obligors of this depositary bond to prevent a wrongful diversion of these funds, after the money had been lawfully withdrawn from the bank. Nor would they be liable for an unlawful diversion by a loan to the bank or an investment in any of its securities, unless they were particeps criminis to the transaction, which is not claimed. The city treasurer's act in investing the proceeds of this check in a time certificate of deposit, whether in this bank or in any other bank, was unlawful and made her liable on her official bond and also brought the transaction within the inhibition of subdivision 4 of C. S., sec. 8379, which makes the deposit of any portion of public money, in any bank or with any banker or other person, otherwise than on special deposit, or as otherwise authorized by law, a felony. The original deposit was made in accordance with C. S., sec. 4046, and therefore, "as otherwise provided by law." The law limits the deposit of a city's money to one or the other of these methods. It must be either a special deposit or as prescribed by C. S., sec. 4046.
Because this indemnity bond, upon which this action is based, contains the condition that it "shall well and truly keep all sums of money so deposited or to be deposited, as aforesaid," it is erroneously argued that the obligors are liable for any misapplication of any of the city's funds that have been at any time lawfully deposited, if such misapplication is done through the joint wrongful action of the city's officers with the same depositary, although done without the knowledge or consent of the bondsmen. It is conceded, however, that appellants are not liable under the terms of the bond, if the money had been lawfully withdrawn and taken to another depositary and misappropriated by a loan in the form of a time certificate. I am unable to see the distinction. The treasurer drew her check by command of the city council expressed in the form of an ordinance. While that part of the ordinance directing her to deposit these funds, when so drawn, in a time certificate, was in violation of law and void to that extent, either with or without the ordinance, she was authorized to withdraw this money upon her official order in the form of a check and when this was done it became a closed transaction and the funds were withdrawn from the bank and reposed in the custody of the treasurer and her subsequent act in thereafter making an unlawful investment, in that or in any other depositary, did not bring this second deposit within the terms of the bond. The words "as aforesaid" limit the liability of the obligors to require the bank to account for money that has been lawfully deposited and which has not thereafter been lawfully withdrawn. There is nothing in the terms of the bond that makes the bondsmen insurers of the city's funds against subsequent misappropriations of this money by the city's officers, after it has been withdrawn in a lawful manner by the proper city officer.
Thus far I have considered the question solely upon the ground that appellants are not liable for the misappropriation of these funds by the joint wrongful action of the city treasurer and the Bannock National Bank when they invested the city's funds in a time certificate and such liability is not within the terms of the surety undertaking. To hold otherwise results in creating a new contractual relation with an additional liability of a higher rate of interest, and also making a contract that permits the city to invest its funds in any of the bank's securities. This change from a lawful deposit to an unlawful investment cannot create a new and different contractual relation between appellants and the City of Pocatello.
"A party who deposits money in a bank on general deposit voluntarily becomes a creditor of such bank and, impliedly, at least, agrees that the bank may commingle such money with its own, and use it until called for by such depositor. The relation of debtor and creditor arises by mutual consent." ( State v. Thum, supra.)
It may be stated that this relationship of debtor and creditor arises by mutual consent whether the deposit be a general deposit subject to check, or a time deposit that may only be withdrawn under the terms of the agreement. Neither of these classes constitutes a special deposit, for a special deposit is where the whole contract is that the thing deposited shall be safely kept and the identical thing returned to the depositor. This contract may arise by express agreement or by the nature of the deposit, as if it were gold plate, or money, or securities locked in a box or sealed up in a package. (Morse on Banks and Banking, 5th ed., sec. 183, p. 413.) A special deposit is a delivery of the property, securities, or even money, to the bank for the purpose of having the same safely kept and the identical thing deposited returned to the depositor. The acceptance of a special deposit imposes no duty on the bank except to keep the deposited article in safety and the deposit has no effect whatever on the title of the money or thing deposited, but the title remains in the depositor. (7 C. J., sec. 630.)
Soon after statehood, this court passed upon the legal relationship that arises out of an unlawful deposit of public money in a bank, in the case of State v. Thum, 6 Idaho 323, 55 Pac. 858. Thum was the receiver of Bunting Co., bankers. The state treasurer, at a time when the law required all public officials charged with the safekeeping of public funds to maintain possession of such funds or place them on special deposit, deposited with Bunting Company about $11,000 of state money. In a proceeding by the First National Bank of Pocatello, Bunting Company was declared insolvent and Thum was appointed receiver of such defunct bank. By intervention upon relation of the auditor and attorney general, the state brought an action to have this deposit declared a special deposit and to give the state a preference for the amount that was being carried by the state treasurer in this bank upon general deposit prior to its insolvency. After a thorough and learned discussion of the question, the court declared that "public money deposited by a public officer in a bank, becomes a trust fund, and not a part of the estate of the bank, and, in case of the insolvency of the bank, its receiver must treat such fund as the property of the true owner, and not of the bank." In this discussion, Mr. Justice Quarles states the issue presented as follows:
"The contention of the respondent that public money deposited in a bank on general deposit, by a public officer, in violation of law, becomes the estate and property of the bank, the owner of the money so deposited, contrary to its will, becoming a mere creditor of the bank, raises the principal question in this case."
The ultimate conclusion reached by the court was that:
" The joint wrong and criminal act of the agent of the state and of the officers of the bank does not redound to the financial interest of the creditors of the bank. The bank received the money in trust for the true owner, the state. It must be regarded as a trustee."
See, also, First Nat. Bank v. C. Bunting Co., 7 Idaho 27, 59 Pac. 929, 1106.
I do not deem it necessary to trace the history of this doctrine, either since or prior to the rendition of these opinions. The rule announced has been so often reaffirmed in this court and its beneficent effects on the public interests are so apparent that I do not apprehend there is even a probability that this court will depart from the doctrine of those cases unless the statute law be changed. I accept this as a correct rule of law controlling this case and all other cases of a kindred nature. Then so far as this court is concerned, it is irretrievably fixed, as a rule of substantive law, that whenever public funds are deposited in a bank contrary to the acts of the legislature defining the manner in which such deposits or investments shall be made, such unlawful attempt results in the creation of a trust in such fund on behalf of the depositing unit; and no title to such fund passes but remains in the depositing unit. If such depositary has intermingled or disposed of that which has been wrongfully deposited or invested, then the courts are bound to declare a trust in favor of the depositing unit against all of the estate of the bank with a preference as against all other creditors equal to the money value of whatever has been so deposited or invested.
No argument or authority is necessary in support of the proposition that the relationship between a trustee and a cestui que trust is not a contractual relationship that arises out of a mutual agreement of the parties. On the contrary, the rights and obligations of the parties are created by operation of an equitable principle of law, and the meeting of the minds of the parties has nothing to do with the creation of the liability on the part of the trustee or of the beneficial interest of the cestui que trust. In the instant case we must hold that the unlawful act between the city authorities of Pocatello and the Bannock National Bank in depositing $32,000 of the city's money on a time certificate of deposit, created a contractual relation between the city and the bank and passed the city's title to this money to the bank, or hold that such unlawful act created the relationship of trustee and cestui que trust, with title remaining in the city. It is impossible that both conditions can arise out of such a transaction.
The act in all of its essentials was equivalent to the city's officials investing city funds in the securities of this bank. They might as lawfully have purchased its stock, any of its bills receivable, or any other asset which the city's officers believed was a good investment. If such an act can be upheld, all restrictions are removed with regard to how officials may invest funds belonging to the public. The amendment to C. S., sec. 4046, was passed in 1919. (Sess. L. 1919, p. 371.) Prior to this the city was without power to invest in the class of securities enumerated in this amendment, that is, government bonds and bonds of the state, etc. It is therefore idle to contend that a city or village has ever had authority to invest its funds in the assets of a bank or otherwise than as provided by this statute.
The City of Pocatello, loaning this $32,000 of its funds to this bank, upon its note in the form of a time certificate, was wholly unauthorized, in violation of law, and the title to this money never passed to the bank but resulted in creating a trust. Appellants' obligation to the city arises solely by virtue of a contractual obligation, the surety bond which they executed. This relationship cannot be materially altered or the terms of the agreement extended by the bank and the city without the consent of appellants.
We must either adhere to the rule announced in State v. Thum, supra, and First Nat. Bank v. C. Bunting Co., supra, that the title to the money remained in the city and gave it a preference right against the estate of the defunct bank, or that the title passed to the bank and the relationship of debtor and creditor continued to exist with regard to this money placed upon time deposit. This latter view would result in the law, as announced in those cases, being no longer available to protect public funds wrongfully deposited. I am of the opinion that this court should not overrule or in any manner modify the law as expressed in those cases and that public funds should continue to be protected under this rule where such funds have been deposited or invested contrary to law, whether there be a sufficient indemnifying bond or not.
As supporting the rule announced in these cases, see the following: Watts v. Commissioners of Cleveland Co., 21 Okl. 231, 95 P. 771, 16 L.R.A., N.S., 918; Myers v. Board of Education, 51 Kan. 87, 37 Am. St. 263, 32 P. 658; Fire Water Commrs. v. Wilkinson, 119 Mich. 655, 78 N.W. 893, 44 L.R.A. 493; San Diego Co. v. California Nat. Bank, 52 Fed. 59; The Ind. District of Boyer v. King, 80 Iowa, 497, 45 N.W. 908; Yellowstone Co. v. First Trust Savings Bank, 46 Mont. 439, 128 P. 596; Board of Commrs, v. Strawn, 157 Fed. 49; State v. Midland State Bank, 52 Neb. 1, 66 Am. St. 484, 71 N.W. 1011.
The only authorities to which my attention has been called or that I have been able to find supporting the contrary view, are two Minnesota cases: Board of Commrs. v. Security Bank, 75 Minn. 174, 77 N.W. 815; Commissioners v. American Loan Trust Co., 75 Minn. 489, 78 N.W. 113.
Some confusion seems to have arisen because of the language employed in some of the later decisions in this state that rely upon the rule as first announced in these earlier cases. I think the correct rule of these cases is that any attempt to place public money in a bank on general deposit when the officer is without statutory authority to do so is ineffectual to create the ordinary relationship of bailor and bailee, but does create the relationship of trustee and cestui que trust, with a preference right to recover against the entire estate of the trustee in case of insolvency, the title to the money or other things attempted to be deposited remaining in the cestui que trust and the right being enforceable only in equity. Public funds in the hands of an officer charged with their safekeeping, where there is no law authorizing a general deposit, may lawfully be placed in a bank or other depositary for safekeeping, as a special deposit, thereby creating the relationship of bailor and bailee that gives rise to any suitable action at law for the recovery of such deposit in case it is not returned upon proper demand. ( Young v. Mercantile Co., 140 Fed. 39.)
I concur in that part of Mr. Justice Budge's opinion, holding: "That in the instant case the time deposit of $32,000 waterworks fund money of the city of Pocatello with the Bannock National Bank is not within the undertaking of the sureties upon the bond in suit; that the bank never acquired title to said deposit, and that a right to the recovery thereof on behalf of the city does not exist as against appellant sureties."
On appellants' application, a rehearing was granted, and they lay special stress upon the point that the $32,000 certificate of deposit was not covered by the bond, and the attorney for the estate of N.G. Franklin, deceased, particularly urged that this $32,000 constituted a trust fund, his conclusion being that no contract covering its safekeeping existed between the city and the bank, and therefore the sureties were not liable.
A careful study of the facts and law bearing thereon has convinced me that there is no justification for the conclusion of the majority on this rehearing. It is established beyond the least peradventure of doubt that the $32,000 represented by a time certificate of deposit was originally placed in the bank on general deposit and under the protection of the bond. With this fact in mind the question for determination is the liability of the sureties on the bond. The sureties promised that the bank "shall well and truly keep all sums of money so deposited . . . . subject at all times to the check and order of the city treasurer . . . . and shall pay over the same upon the check of said city treasurer . . . . and shall in all respects save and keep the city . . . . harmless and indemnified for and by reason of making said deposit. . . ."
The change in the nature and character of the deposit (if in fact there was any) constituted a plain violation of the condition of the bond that the bank would keep all sums of money so deposited subject to the check of the city treasurer. If, therefore, the manipulation on the part of the treasurer and the bank effected the placing of the funds then on general deposit in the bank, subject to check, on time deposit, not subject to check, the sureties were plainly liable, for they obligated themselves that the money placed on deposit would be kept on deposit subject to check. In the face of the express condition of the bond that the bank would keep all the money deposited by the city subject to the check of the treasurer, the opinion of the Chief Justice holds that because money deposited on a general checking account was thereafter, by the bank and the city treasurer, in violation of law, placed on time deposit, the sureties, some of whom were in active charge and control of the bank and of this deposit and who participated in taking the $32,000 from the protection of the bond and placing it on a time deposit, were discharged from their solemn obligation to the city. In my judgment, such holding is not supported by the decisions, and does violence to the contractual obligations of these parties. ( State ex rel. Carroll v. Corning State Savings Bank, 136 Iowa, 79, 113 N.W. 500; State v. United States Fidelity Guaranty Co., 81 Kan. 660, 106 P. 1040.)
The bond was given to secure deposits in the bank and not to cover the liability of the treasurer, but by the terms of the bond it was incumbent on the bondsmen to see that the bank kept this money subject to check. While the treasurer might be liable on his bond for depositing the money in an account not subject to check, this would not relieve the bondsmen from their liability to see that the bank kept the money subject to check, and consequently the bondsmen are liable if the bank departed from the obligation of the bond. ( State ex rel. Carroll v. Corning State Savings Bank, supra.) The city, not the treasurer, was the obligee in the bond.
"The contention is that the arrangements and practices in respect to these state funds, as between the Treasurer and the bank, were illegal, and therefore not binding on the surety. If, instead of depositing the money for collection, as the law contemplates, it was in fact allowed by the Treasurer to remain in the bank for long periods, and a consideration was paid for its use, as appellants sought to show, may the bank set that up as a defense, when the state demands payment of the money which the bank has collected and holds, or is it any reason why the appellant should escape liability on the obligations written in the bond which it signed? . . . . If the bank made an improper use of the funds with or without the consent of the Treasurer, it will not avail the surety. Its liability is not contingent upon the neglect of the Treasurer or the legality of his action. . . . .
"The same question was involved to some extent in Loper v. State, 48 Kan. 540, 29 P. 687, where an illegal arrangement was made as to the deposit of county funds, and the county commissioners had contributed to it by failing to designate a depositary. The sureties on the bond of the defaulting treasurer, who under the arrangement had the use of the public funds, set up as a defense the neglect of the commissioners. In response to this, the court said: 'Parties cannot make an arrangement favoring the violation of a statute regulating the duties of a public officer, and, having obtained an advantage or profit thereby, ask that their liability upon the official bond of such officer be lessened or discharged because the statute was not complied with.' ( Rose v. Douglass Township, 52 Kan. 451, 39 Am. St. 354, 34 P. 1046; Hart v. United States, 95 U.S. 316, 24 L. ed. 479; Board of County Commrs. v. Security Bank, 75 Minn. 174, 77 N.W. 815; Estate of Ramsey v. People, 197 Ill. 572, 90 Am. St. 177, 64 N.E. 549; Stoeckle v. Lewis, 8 Del. Ch. 150, 38 Atl. 1059; Anderson v. Blair, 121 Ga. 120, 48 S.E. 951; State v. Pederson, 135 Wis. 31, 114 N.W. 828; Commonwealth v. Tate, etc., 89 Ky. 587, 13 S.W. 113; 27 A. E. Ency. of L. 544.)" ( State. v. United States Fidelity Guaranty Co., supra. See, also, Scott v. Whipple, 119 Ga. 485, 46 S.E. 663.)
It is said in the opinion of Justice Budge that the city treasurer withdrew $32,000, then on general deposit, and deposited it on time deposit. The city treasurer never at any time actually withdrew $32,000 on general deposit and placed it on time deposit. That the treasurer actually drew his check and the bank gave him a time certificate of deposit therefor is supported by the facts and the findings of the trial court, but it was a mere bookkeeping arrangement. Yet it is held that this so-called transfer of funds from a checking account to a time deposit, despite the condition of the bond that no such transfer would be made, discharged the sureties from their obligation.
It is unnecessary to consider whether or not this deposit was a trust fund, a bailment or a deposit as authorized by law, for, if authorized by law, it is clearly covered by the terms of the bond, and the bank not paying it, appellants are liable; if the deposit was 'not authorized by law, nevertheless if not made subject to check or order or demand, it was in violation of the terms of the bond and the bondsmen are liable therefor. Appellants contend it was a departure from the bond relieving them from liability, but, if anything, under the terms of the bond, it was a violation. I do not think it necessary to hold that giving a certificate of deposit was a proper or improper method of handling these funds, since it is immaterial on the question of appellants' liability. Such position is clearly correct because of the further provision of the bond that the bondsmen would, in all respects, "save and keep the city of Pocatello, Idaho, and the treasurer thereof, harmless and indemnified for and by reason of making of said deposit or deposits." If the bank did not keep the funds subject to check, it was as much a violation of the bond as its refusal or inability to pay upon proper demand. ( United States Fidelity Guaranty Co. v. City of Pensacola, 68 Fla. 357, Ann. Cas. 1916B, 1236, 67 So. 87.) In effect, the appellants say the bank and the treasurer did not violate but departed from the bond when they did not comply with the terms of the bond requiring the deposit to be kept in a certain way and therefore, when the bank again violated the bond by not paying, the bondsmen are not liable. In other words, if the bond were only violated once, by nonpayment, the appellants admit liability, but if the bond be violated twice, because the deposit was not kept as the bond guaranteed it would be and by not being paid on demand, they were absolved. The statement carries its own refutation.
The majority opinion on rehearing entirely overlooks the provision of the bond to the effect that the bank, in the first instance, and the sureties, secondarily, were liable to see that the bank kept the funds subject to the check or order of the city treasurer, and that the bondsmen were obligated to save and keep the City of Pocatello, and the treasurer thereof, harmless and indemnified by reason of making said deposit or deposits.
In order to escape payment of the money lost to the city, the sureties invoked the rule "strictissimi juris," and their liability is so measured, in the opinion of Justice Budge. There is no occasion here for this rule; it is not available to appellants. The trial court found "that said bond was not signed by defendants or any of them without consideration . . . . nor did defendants execute said bond as accommodation sureties without consideration." No question is made of the sufficiency of the evidence to sustain this finding. These sureties were stockholders, officers and directors of the bank. They applied for the deposit of the funds of the city and used them for years. They signed the bond for a valuable consideration. It is not such sureties as these who may successfully invoke the doctrine "strictissimi juris." But measuring liability by this strict rule, the sureties are, as held in the first opinion, plainly liable.
It is said that the facts of this case differ from Blaine County v. Fuld, 31 Idaho 358, 171 P. 1138. The turning point in each case is the same. In that case this court said that "no effect can be given to an unlawful attempt on the part of the county treasurer and county auditor to take such funds out of the protection of the depositary law and place them on deposit in the same bank without the security of the depositary bond." In this case the same thing was attempted. About the only difference in the two cases is that in the Blaine county case the surety was not a party to what the court called an "unlawful conspiracy," while in this case, in attempting to take the funds of the city from the protection of the depositary bond and place them on deposit in the same bank without the protection of the depositary bond, the sureties in charge of the bank were parties to the "unlawful conspiracy." The case against the sureties here is stronger than in the Blaine county case but the result is the opposite.
All the parties to the bond knew that the $32,000 belonged to the city, that it was a public fund. They knew that it had been deposited according to law and that it was protected by the bond. The principal obligation of the bond was to save the city harmless and indemnified. Under the majority holding the sureties are released from their obligation to the city because the bank (operated by some of the sureties) and the city treasurer, without authority of law and in violation of a condition of the bond, attempted to take the city's funds from under the protection of the bond. I see neither reason nor justice in such a result.
The opinion of the Chief Justice is based on State v. Thum, 6 Idaho 323, 55 P. 858, which relates to a deposit made in violation of law. The Thum decision is not even an authority on the question before us; for here the deposit of the funds of the city on general deposit, under the protection of a bond, was not unlawful; and it was a long time after the funds of the city had been lawfully deposited that the bank and treasurer attempted to effect a change in the character of the deposit.
The length of the foregoing opinions precludes further discussion except to say that the opinions prepared by the Chief Justice and Justice Budge agree only in the result that the sureties are not liable for the $32,000. Otherwise they are as far apart as the poles. Despite extensive head-notes, not a single rule of law is established by the two opinions.
No new point is made by appellants that the rate of interest on this $32,000 was increased to four per cent, whereas the bond provides for only three per cent, and that, by such change, the sureties were discharged. Though there is some conflict ( Bearse v. Lebowich, 234 Mass. 492, 125 N.E. 621; Schroyer v. Thompson, 262 Pa. 282, 105 Atl. 274; Schwartz v. Smith, 143 App. Div. 297, 128 N.Y. Supp. 1; 32 Cyc. 185), this change was not so vital a part of the transaction as to relieve the sureties of liability to the extent to which they agreed to be liable, namely, three per cent.
Except as modified by what is herein stated, I adhere to the original opinion and dissent from the opinions of Justice Budge and the Chief Justice on rehearing.
Wm. E. Lee, J., concurs in the dissenting opinion of Givens, J.