Opinion
No. 18744
Decided March 17, 1925.
Fraud — Directed verdict — Absence of proof of knowledge of fraudulent transaction — Attorney's notice or knowledge imputed to client — Inapplicable where attorney acts in own interest for personal profit.
1. Where knowledge of a fraudulent transaction is a necessary element of recovery against a defendant, and the evidence at the close of plaintiff's case does not tend to prove such knowledge, actual or constructive, nor does the evidence afford a reasonable inference thereof, a motion for a directed verdict in favor of defendant is properly sustained
2. The general rule that notice to an agent is notice to his principal applies to the relation of attorney and client, and an attorney's notice or knowledge of facts affecting the rights of his client will be considered notice to the latter.
3. An exception to such general rule exists where a creditor employs an attorney to collect a claim and the attorney, after partially enforcing such collection, enters into an agreement with the debtor, without the creditor's knowledge, whereby the debtor is enabled to dispose of certain assets of a corporation of which he is an officer, which corporation is not indebted to the creditor, out of which transaction the attorney makes a personal profit from the debtor, and the debtor is enabled to meet other obligations, the knowledge obtained by the attorney in such transaction is not to be imputed to the creditor, even though a part of the proceeds of the transaction between the debtor and the attorney is applied upon the claim of the creditor due from the debtor, such transaction between the attorney and the debtor being outside the scope of the attorney's employment by the creditor and not within the knowledge of the creditor.
ERROR to the Court of Appeals of Hamilton county.
This is a proceeding in error to reverse the judgment of the Court of Appeals of Hamilton county.
The record discloses that the American Export Inland Coal Corporation, plaintiff in error, brought a suit in the court of common pleas of Hamilton county, Ohio, against the Old Colony Smokeless Coal Company on an account for money. An affidavit for attachment and garnishment was issued and served on the Matthew Addy Company, defendant in error herein. The garnishee in that proceeding answered that it was not indebted to the Old Colony Smokeless Coal Company, and had no property, money, or effects belonging to it in its possession. Plaintiff, thereupon, claiming that the answer was unsatisfactory, brought an independent action by virtue of Section 11851, General Code, against the Matthew Addy Company, the petition alleging in substance that the defendant, acting by and through Nelson B. Cramer, its attorney, had received from John H. Kresge the sum of $7,500 belonging to the Old Colony Smokeless Coal Company, to which sum the Matthew Addy Company at the time knew or under the circumstances was charged with knowing Kresge had no legal title, and no legal right to pay it over to apply on his own debt to defendant, the Matthew Addy Company; that said defendant company had not paid back the said sum of money to the Old Colony Smokeless Coal Company, or otherwise accounted for the money, and that, therefore, at the time of the issuance of the order of garnishment defendant had in its possession moneys, property and credits belonging to the Old Colony Smokeless Coal Company. The petition prayed that the defendant, the Matthew Addy Company, be required to make full disclosure, and that judgment be rendered against it in favor of the plaintiff.
An answer was filed by the Matthew Addy Company, which put in issue the averments of the petition.
The record discloses that John H. Kresge, who was associated with the Old Colony Smokeless Coal Company as its vice president and a member of its board of directors, was interested in the Dwale Coal Company and the Reliance Coal Coke Company of West Virginia; that Kresge was individually indebted to the Matthew Addy Company in a large sum of money. The Matthew Addy Company had placed its claim for collection in the hands of Nelson B. Cramer, an attorney at law, and Cramer had collected upon said indebtedness about $40,000, leaving a balance still due from Kresge to the Matthew Addy Company of approximately $75,000. Cramer was still pursuing Kresge, and immediately prior to October 29, 1920, had filed suits against Kresge and his companies in Kentucky, New Jersey, Wisconsin and elsewhere. The Wisconsin suit brought by the Matthew Addy Steamship Commerce Corporation, an associated company of defendant, was against the Old Colony Smokeless Coal Company and included a garnishment of a large account due the Old Colony Smokeless Coal Company from the Western Malleables Company. Kresge was in financial straits, and was doubtless considerably embarrassed by the several suits filed against him and by the garnishment proceedings. He had two trade acceptances due the Old Colony Smokeless Coal Company from the International Coal Dock Company, each of which was in the sum of $10,000. These two trade acceptances, and the amount due from the Western Malleables Company in Wisconsin to the Old Colony Smokeless Coal Company, seemed to be the most available assets that Kresge could realize upon in order to meet pressing claims, including pay rolls at coal mines. The Old Colony Smokeless Coal Company was the sales agent for the Dwale Coal Company and the Reliance Coal Coke Company, whose pay rolls Kresge desired to meet, and it seemed necessary in order to procure money for the pay rolls that the sales agency, the Old Colony Smokeless Coal Company, should produce the same. Kresge appealed to Cramer, the attorney for his largest creditor, and as a result of that conference Cramer agreed to take in consideration of $7,000 an assignment of the account of the Western Malleables Company and the two trade acceptances. This assignment was made by Kresge, vice president, and W.T. Pottinger, treasurer, of the Old Colony Smokeless Coal Company, Cramer giving his check for $7,000 payable to the Old Colony Smokeless Coal Company as agent for the Dwale Coal Company and the Reliance Coal Coke Company. In addition there was in oral agreement that Cramer would turn the two trade acceptances back to Kresge to be discounted, upon condition that Kresge paid Cramer personally $2,000 and paid Cramer, as attorney for the Matthew Addy Company, $7,500 to apply on the claim which the Matthew Addy Company had against Kresge. The two trade acceptances, Cramer claims, were turned back in accordance with the agreement, and the same were discounted at an Ashland, Ky., bank, the Old Colony Smokeless Coal Company being given a credit on November 5, 1920, of $19,809.34, against which account the Old Colony Smokeless Coal Company, by J.H. Kresge, vice president, and W.T. Pottinger, treasurer, gave a check dated November 6, 1920, to J.H. Kresge personally. This check for $10,000 was deposited by Kresge in the Citizens' National Bank of Cincinnati on November 9, together with a check of $5,000 on the Guarantee Trust Company of New York, payable to J.H. Kresge, dated November 8, 1920, and signed by Nelson B. Cramer, the balance in Kresge's account in the Citizens' National Bank immediately prior to said November 9 being less than $200.
On November 11, 1920, the Matthew Addy Company deposited a check given by John H. Kresge on the Citizens' National Bank of Cincinnati. This check is dated November 1, 1920, and Cramer testifies he received it before the trade acceptances were turned back to Kresge, and that being about to depart on a business trip for New York he carried the check with him in his pocketbook and mailed the same back to Cincinnati, either to the defendant company, or to some employe in his office to be delivered to the Matthew Addy Company.
Under date of November 9, Kresge gave Cramer a check for $7,000 and received back from him the check for $5,000 upon the Guaranty Trust Company of New York.
This transaction, it is urged, gave a personal profit of $2,000 to Cramer for thus temporarily assisting Kresge in the handling of his various affairs.
The trade acceptances that were discounted at the Ashland, Ky., bank it is claimed furnished the source from which Kresge paid the $7,500 to the Matthew Addy Company, and that the same were the property of the Old Colony Smokeless Coal Company. It is claimed that Kresge had authority from the Old Colony Smokeless Coal Company to deal with the trade acceptances and the account receivable in the manner he did. This is denied by the plaintiff in error. Cramer denies any knowledge of the source from which the $7,500 paid to the Matthew Addy Company came, but avers that if Kresge was guilty of any wrongful use of the property of the Old Colony Smokeless Coal Company it was after the trade acceptances in question had been turned back to him, and that he, Cramer, was in ignorance from what source the money was to come to meet the check theretofore given him for the $7,500 for the Matthew Addy Company.
As a result of these manipulations the plaintiff in error claims that the Old Colony Smokeless Coal Company became insolvent, and that plaintiff in error is thereby unable to collect its claim against such company; that the $7,500 which was paid to the Matthew Addy Company was in fact the property of the Old Colony Smokeless Coal Company, and should not have been used by Kresge to pay his individual debts; that, therefore, the Matthew Addy Company has no legal right or title to that amount, it being in truth and fact the property of the Old Colony Smokeless Coal Company. The defendant in error, the Matthew Addy Company, denies all knowledge of the source of the money it received from its attorney, and claims to be an entirely innocent recipient thereof, and, as a creditor of Kresge, that it had the right to accept and retain the same.
Upon the issues as made by the pleadings and the record, disclosing in substance the foregoing facts, a motion was made at the close of the testimony for plaintiff in error for a directed verdict in favor of defendant in error, the Matthew Addy Company. This motion the judge of the court of common pleas sustained and rendered judgment accordingly. Error was prosecuted to the Court of Appeals, where the judgment was affirmed. Error is now prosecuted to this court to reverse said judgment.
Mr. Walter K. Sibbald and Mr. Stuart R. Ducker, for plaintiff in error. Mr. Julius R. Samuels and Mr. Nelson B. Cramer, for defendant in error.
The two points upon which this controversy turns are, first, whether or not there was any evidence entitling the plaintiff in error to have its case submitted to the jury; and, second, whether the knowledge of Nelson B. Cramer, attorney for the defendant in error, is to be imputed to the defendant in error and it thus be chargeable therewith.
As to the first point: Is there any evidence, or a reasonable inference which can be drawn from all the evidence submitted in the record, tending to show that the Matthew Addy Company knew that it was getting Old Colony Smokeless Coal Company money? We have examined the record and fail to find such evidence. The circumstance, that the $7,500 check was deposited by the Matthew Addy Company in the Citizens' National Bank of Cincinnati on November 11, two days after Kresge had deposited $15,000 to his own account in the same bank, is not such that a reasonable inference can be drawn therefrom that the Matthew Addy Company was a party to the alleged manipulations of the Old Colony Smokeless Coal Company's funds by Kresge and Cramer. This check was received by the Matthew Addy Company from its attorney, Cramer, and, while Cramer may have had knowledge of the condition of the account of Kresge, we cannot charge such knowledge to the Matthew Addy Company unless we make it chargeable with Cramer's knowledge, a point which is discussed in the next proposition.
Failing to find that the record discloses any evidence, or reasonable inference to be drawn therefrom, which tends to show knowledge on the part of the Matthew Addy Company of the fraud complained of, we reach the conclusion that the Matthew Addy Company was innocent of fraud, if such existed.
This brings us to the second proposition: Is the knowledge of Cramer, the attorney for the Matthew Addy Company, to be imputed to it and it thus be chargeable therewith? Of course the general rule is that notice to an agent is notice to his principal, and this doctrine applies to the relation of attorney and client, and an attorney's notice or knowledge of facts affecting the rights of his client will be considered notice to the client. There are, however, exceptions to this general rule, and among them is that when the attorney engages in a transaction in his own interest, and under circumstances that would lead him not to impart the knowledge thus obtained to his principal, the presumption that the knowledge thus gained should be imputed to his client does not always prevail.
In the case of Union Square Bank v. Hellerson, decided by the Supreme Court of New York, 90 Hun, 262, 35 N.Y. S., 871, the facts were that in an action brought by the bank upon a promissory note the defendant Charles Hellerson interposed a defense to the effect that he indorsed the note for the accommodation of the maker, the defendant Hammersen, and solely for the purpose of having it deposited with Fromme Bros., lawyers; that it was expressly agreed that the note should never be used as a legal obligation of Hellerson, and that the bank, Fromme Bros., the attorneys, and one Manning, the bank's assignor, each had notice of such facts; and that the transfer of the note by Manning to the bank was without valuable consideration, and with notice of its diversion from the purpose for which it was indorsed by Hellerson.
Upon the trial of the action it appeared that Fromme Bros. were prosecuting a claim of the bank against John B. Manning, and that at the same time Hammersen was purchasing a brewery of Manning, in which latter transaction Fromme Bros. were acting as attorneys for Hammersen. The note was transferred before maturity by Hammersen to Manning to pay for the brewery, and by Manning to the bank, which thereupon surrendered certain shares of stock which it held as collateral for its claim. Hammersen testified that he told Mr. Fromme that Hellerson was an accommodation indorser, but his testimony did not show that he told Mr. Fromme that the note was not to be used:
"Held, that, as in the transaction relative to the brewery, Fromme [the attorney] was not acting for the plaintiff [bank], but for Hammersen, whatever knowledge Fromme acquired in that transaction from Hammersen as to the nature of Hellerson's indorsement could not be imputed to the plaintiff [the bank]; and that the plaintiff was entitled to recover."
The above case is not dissimilar in fact and principle from the case at bar, for as the court points out in its opinion, Fromme, the attorney, in the transaction relative to the securing of the note, was not acting for the bank, but in the interest of Hammersen, even though the bank ultimately got the proceeds of the note. In the opinion at page 215 (35 N.Y. S., 873) the court says:
"It is clear that in this part of the transaction Fromme was acting, not as the attorney for the bank, but for Hammersen. He was attending to Hammersen's business, and not that of the bank, and whatever knowledge he had in regard to the origin of the note could not be imputed to the bank, because he was not acting for the bank. he did not receive the notes upon the part of the bank, but, on the contrary, received them for the purposes of the transaction with Manning, handed them over to Manning, and Manning took them to the bank which received them without any notice of this remarkable agreement, that these indorsements were made simply for child's play.
"We think that, under these circumstances, there was no foundation for the claim that Fromme's knowledge, if he had any, as to this remarkable contract in regard to these indorsements, was to be imputed to the bank."
In the case of Melms v. Pabst Brewing Co., 93 Wis. 153, 66 N.W. 518, 57 Am. St. Rep., 899, the facts were that executors of an estate, acting through an attorney, indirectly sold the property in question to one of their number, which was in direct violation of a statute which prohibited such procedure, and was also fraudulent as to creditors of the decedent. The attorney who handled the deal, and who knew of the infirmity of the title passed by such sale made in violation of the statute, also represented the purchaser of the property after the executors had sold the property indirectly to one of their number. By reason of the statute, the title taken by the Pabst Brewing Company was a voidable one, but could be avoided by the latter purchaser only if it had, or was charged with, knowledge of the infirmity. The argument was advanced that inasmuch as its attorney had notice of the infirmity of the title the property was taken with knowledge or notice of that fact, and undoubtedly the attorney did have notice or knowledge, as the sale to the defendant was made five months after the illegal sale, and what he knew five months before he undoubtedly knew five months later. However, the court in that case held that the defendant was not charged with the notice that its attorney had, and although the court recognized the general rule that a client is bound by notice that its attorney has, it decided the case as an exception to the general rule.
At page 169 of the opinion (66 N.W. 523), the court said:
"The whole doctrine of imputed notice to the client or principal rests upon the ground that the attorney or agent has knowledge of something, material to the particular transaction, which it is his duty to communicate to his principal. Wyllie v. Pollen, 3 De Gex, J. S., 601. And notice of it will not be imputed to the client where it would be a breach of professional confidence to make the communication; and where the interest in, or the relation of the attorney to, the previous transaction is such as would be sufficient to induce him to withhold the information, the presumption of its communication is rebutted. The client will not be charged with notice of a fraud or wrong to which his attorney was a party while employed by another and which it is quite certain he would conceal. Kettlewell v. Watson, 21 Ch. Div., 707."
See, also, 4 A. L. R., 1618; Benedict, Ex'r. v. Arnoux, 154 N.Y., 715, 49 N.E. 326; Olyphant v. Phyfe, 48 App. Div. 1, 62 N.Y. S., 688.
A good statement of the rule is found in Allen v. South Boston Rd. Co., 150 Mass. 200, at page 206 ( 22 N.E. 919, 5 L.R.A., 716, 15 Am. St. Rep., 185):
"The general rule is, that notice to an agent, while acting for his principal, of facts affecting the character of the transaction, is constructive notice to the principal. Suit v. Woodhall, 113 Mass. 391; National Security Bank v. Cushman, 121 Mass. 490; Sartwell v. North, 144 Mass. 188; The Distilled Spirits, 11 Wall., 356. There is an exception to this rule when the agent is engaged in committing an independent fraudulent act on his own account, and the facts to be imputed relate to this fraudulent act. It is sometimes said that it cannot be presumed that an agent will communicate to his principal acts of fraud which he has committed on his own account in transacting the business of his principal, and that the doctrine of imputed knowledge rests upon a presumption that an agent will communicate to his principal whatever he knows concerning the business he is engaged in transacting as agent. It may be doubted whether the rule and the exception rest on any such reasons. It has been suggested that the true reason for the exception is that an independent fraud committed by an agent on his own account is beyond the scope of his employment, and therefore knowledge of it, as matter of law, cannot be imputed to the principal, and the principal cannot be held responsible for it. On this view, such a fraud bears some analogy to a tort willfully committed by a servant for his own purposes, and not as a means of performing the business intrusted to him by his master. Whatever the reason may be, the exception is well established. Kennedy v. Green, 3 Myl. K., 699; Espin v. Pemberton, 3 De G. J., 547; Rolland v. Hart, L. R., 6 Ch., 678; In re European Bank, L. R., 5 Ch., 358; Cave v. Cave, 15 Ch. D., 639; Kettlewell v. Watson, 21 Ch. D., 685, 707; Innerarity v. Merchants' National Bank, 139 Mass. 332; Dillaway v. Butler, 135 Mass. 479; Atlantic Cotton Mills v. Indian Orchard Mills, 147 Mass. 268; Howe v. Newmarck, 12 Allen, 49."
Now, the scope of the employment with which Cramer was intrusted by the Matthew Addy Company was the collection of its claim against Kresge. He had pursued that employment with considerable success, and then, upon Kresge's solicitation, sought to make a personal profit entirely in his own self-interest by entering into the agreement with Kresge with reference to the Old Colony Smokeless Coal Company's assets. This plan by which Cramer was to profit to the sum of $2,000, at least, and as a result of which Kresge was to secure money for himself, with a part of which be was to pay not only the Matthew Addy Company, but his own personal claims and pay rolls of his subsidiary companies, was surely no part of the employment of Cramer by the Matthew Addy Company. The record does not disclose any authority for the $7,000 purchase of any of the Old Colony Smokeless Coal Company's assets. The knowledge which Cramer obtained of the affairs of Kresge and the Old Colony Smokeless Coal Company was obtained long after the employment of Cramer by the Matthew Addy Company, and this knowledge was used by Cramer in his own interest, and to further his own personal profit as well as Kresge's. The fact that he pursued the agency with which he had been intrusted by the Matthew Addy Company within the scope of that employment, and secured a further collection from Kresge to be applied upon the debt that Kresge owed his principal, the Matthew Addy Company, does not bind the principal in the transaction outside the scope of that employment, the transaction involving a $7,000 investment and a resale of assets thus secured, by which the attorney was to make a purely personal profit, entirely in his own interest and apart from his client's authority, with an accompanying depletion of the resources of Kresge, the debtor, to the extent of at least $2,000.
Even conceding all that the plaintiff in error claims as to the transaction of Cramer and Kresge with reference to the Old Colony Smokeless Coal Company's property, we fail to find that as a matter of law the knowledge so gained by Cramer in the transaction, which was for his own personal profit and self-interest, and outside the scope of his employment by the Matthew Addy Company, and relating to a transaction purely between himself and Kresge, should be imputed to the Matthew Addy Company. At least we can find nothing in this record that justifies imputing the knowledge of the attorney to the client under the circumstances disclosed, nor are we able to find that the title to money, or the proceeds of a check, which are received by an innocent creditor to be applied upon his debtor's claim, can be followed into such creditor's hands unless knowledge, either actual or constructive, of the fraudulent transaction from which such moneys or checks come, can be traced to such creditor. Atlantic Cotton Mills v. Indian Orchard Mills, 147 Mass. 268, 273, 17 N.E. 496, 9 Am. St. Rep., 698; Nickerson v. English, 142 Mass. 267, 268, 8 N.E. 45; Thacher v. Pray, 113 Mass. 291, 18 Am. Rep., 480; Lime Rock Bank v. Plimpton, 17 Pick., (34 Mass.), 159, 28 Am. Dec., 286.
Entertaining these views, we are of opinion that the court of common pleas in directing a verdict and entering judgment in favor of the Matthew Addy Company was right, and that the judgment of the court of appeals in sustaining the same should be affirmed.
Judgment affirmed.
MATTHIAS, KINKADE and ROBINSON, JJ., concur.
MARSHALL, C.J., dissents.
JONES, J., not participating.