
    LIABILITY OF SURETIES ON BOND OF. STATE TREASURER..
    Circuit Court of Franklin County.
    The State of Ohio v. Herbert McKinnon et al.
    
    Decided, January 16, 1912.
    
      Sureties — Liability of, on the Bond of a State Treasurer — Where Public Funds were Unlawfully Loaned and Interest Accepted Thereon as a Gratuity — Illegality of Loans Immaterial■ — Interest Follows Principal and-Bond for Faithful Performance Covers Both — Defense of Settlement with State Auditor Not Sufficient.
    
    1. Where a treasurer of state loans and deposits the public funds in his custody and receives and converts interest thereon during his official term, a liability for the interest so ■ received is thereby created, enforceable against the obligors upon the official bond.
    2. The liability so arising is within the purview of the official bond, although the loans and deposits from which the' interest sprang were made in violation of a penal statute;
    
      3. The settlement with the auditor of state by the treasurer or his legal representative of the amount of the principal fund (not, however, including interest) and the receipt thereof by virtue of said settlement by the successor in the office of treasurer of state do not estop nor prevent the state from recovering the amount of interest received as aforesaid.
    • Timothy 8. Hogan, Attorney-General, H. J. Booth and B. W. McCoy, for the state.
    
      Cyrus Huling, A. T. Seymour and J. E. Todd, contra.
    Allread, J.; Ferneding, J., concurs; Dustin, J., dissents in a separate opinion.
    
      
       For opinions below see 9 N.P.(N.S.), 513, and 11 N.P.(N.S.), 165.
    
   The state brought an action against the administrator of the estate of the late William S. McKinnon and the sureties upon •his official bond as Treasurer of State to recover interest upon loans and deposits of the public funds alleged to have been received by McKinnon during his official term. Demurrers were presented- in the court of common pleas to the amended petition and overruled. The defendants, thereupon, answered.

The first -defense is in substance a denial of the making of loans and receipt of interest. The second defense sets forth as a bar to the action, a statement on behalf of the treasurer, settlement by the Auditor of State and acceptance thereof by his successor in the office of Treasurer of State.

A demurrer was presented to the second defense. The court upon consideration of the demurrer searched .the entire record, .found the amended petition insufficient, sustained a demurrer, thereto,, and dismissed the action.

The state excepted and brings the cause to this court upon petition in érror.

• The amended petition in the court of common pleas presents the question of the liability of the state treasurer and the sureties upon his official bond for interest upon loans and deposits received by him during his official'term. *

The question so presented has been fully and ably argued by counsel.and all the reported cases, both in the state and- elsewhere, have been cited and discussed.

Upon full consideration, we are of opinion that the doctrine is settled' in this state by the ease of Eshelby v. Board of Education., 66 O. S., 71, that a public treasurer is a mere custodian of the public funds,- has no other right or title thereto, and can confer no right or title to others.

The funds, therefore, when loaned or deposited, were still the public funds, the title and ownership of which was in the state, and the interest accruing thereon followed the principal and became the property of the state by the same right as the principal itself.

This decision has never been departed from, criticised nor doubted by any adjudication in this state, and forms the basis of civil liability.

It has been applied and followed in the following eases:

Glenville v. Englehart, 19 C. C., 285; State, ex rel Rulison, v. Schott, 9 N. P. (N. S.), 522; State, ex rel, v. Banks, 7 N. P. (N. S.), 43; Nicholson v. Maile, 3 N. P. (N. S.), 513.

And also by Judges Evans and Bigger of the-court of common pleas in the former rulings on demurrer to the petition in the ease at bar. State v. McKinnon, 9 N. P. (N. S.), 513; State v. McKinnon, 11 N. P. (N. S.), 165.

We have, therefore, no difficulty in reaching the conclusion that it became the duty of McKinnon and is now the duty of his administrator to account for and pay to the state the interest so received.

The chief contention of the learned counsel for defendants in this court is—

(1) That the liability for interest is not within the terms of the official bond; and

(2) That the interest arising out of illegal acts is not contemplated by the general terms of the bond and the statutes prescribing its conditions.

It may be conceded that the sureties may stand upon .the strict letter of the bond, and of the statutes made part thereof, by reference, and that their liability can not be extended beyond the terms and provisions §o employed,

The conditions of the bond required the said William S. Mc-Kinnon to “faithfully discharge the duties imposed upon him by’ law ■ * * * and to turn over and deliver to his successor in office, or other person entitled thereto, all money and other property coming into his custody as Treasurer of State for the state of Ohio, as required by law.”

■ Section 182, Revised Statutes, provides that the bond shall be conditioned “for the faithful performance of the duties of his office as the same are prescribed by law.”

Among the duties so prescribed, the Treasurer of State, upon •expiration of his term, is required (Section 198, Revised Statutes) to make full settlement “of all moneys, property and effects belonging to * * * the state treasury, ’ ’ and is further required to “forthwith pay over to his successor or the person appointed to act as treasurer the several sums of money so certified, and also deliver to him allo the books, accounts, vouchers, official papers and correspondence, together with all other property, bonds, securities, claims, assets and effects belonging to the treasury.”

. By the statute as well as the express terms of the bond the state treasurer became so bound to turn over to his successor all money and other property belonging to. the state.

The terms are comprehensive; the test is the ownership of the state. When the ownership of the state is established to funds in the possession of the state treasurer, he is bound to turn them over to his successor.

The receipt of public funds by the state treasurer becomes official. The treasurer can not assert and maintain an individual possession of public funds against the state. He can not with one hand collect the principal of the public funds as official custodian and with the other hand collect and hold the interest as his own. The title to both principal and interest being in the state, the failure of the treasurer to turn over the augmented fund falls within the express terms of the bond.

■, The illegality of the loan from which the interest sprang is relied upon as a reason for excluding interest from the purview of the bond. It is asserted that in contemplation of the statute, and, therefore, of the bond, there can be no interest, and that the bond should be so read and construed.

The case of State v. Pierson, 83 O. S., 241, is cited. That was a criminal ease and involved a construction of the statute making conversion of public moneys by the custodian embezzlement. The statute, it was held, did not contemplate interest, but only the original fund. The case does not pretend to settle the civil liability. The case of Eshelby v. Board of Education is cited, and its authority in civil cases is acknowledged.

Counsel for defendants cite Renfroe v. Colquitt, 74 Ga., 618, and Wilkesbarre v. Rockafeller, 171 Pa. St., 177, and the classification of authorities found in State v. McFetridge, 84 Wis., 473.

Both the Renfroe and Rockafeller cases are weakened as authority by dissents, and the Rockafeller ease is not parallel on the facts.

The McFetridge case merely acknowledges and classifies the Renfroe case without expressly approving its authority, and upon closely allied facts, holds the sureties liable.

In the case of Eshelby v. Board of Education, the treasurer of the board of education having authority to deposit funds, but no authority to use, loan or invest them, deposited them upon interest, and was held liable for the interest. The manner of deposit as indicated by the opinion was an investment prohibited and made criminal by statute. While the suit was against the treasurer alone, still his liability was measured by the conditions of the bond. The contention made here, that interest arising solely out of an unlawful and criminal act is not contemplated by the bond, could have been made with equal plausibility there. Had the funds in that case remained in the custody of the treasurer or been deposited as enjoined by law, no interest could have arisen. The interest there, as here, sprang from illegal loans or investments. The decision, therefore, carries by necessary inference the conclusion that interest upon the public funds, although the fruit of illegal loans, may be recovered as a breach of the official bond.

The case of State, ex rel, v. Griffith, 74 O. S., 80, is distinguishable. Griffith was clerk of the board of education, and by resolution of tbe board authorized to collect tuition dues. This be did and failed to account. It was held that tbe sureties upon bis official bond were not liable, because be was not charged by law with tbe receipt and custody of the funds, and that bis duties, for which bis bond w,as conditioned, could not be so enlarged by resolution or appointment of tbe board.

In the case under consideration McKinnon held and controlled tbe public funds under provision of law and in bis official capacity as state treasurer. While in tbe exercise of tbe control and custody of tbe public fund tbe treasurer illegally loaned them, yet tbe fund was still in bis custody and control by virtue of his office. See Drolesbaugh v. Hill, 64 O. S., 257.

It is too narrow a construction of an official bond to bold that it does not include liability for tbe consequences for illegal acts.

In the case of City of Greenville v. Anderson, 58 O. S., 478, Williams, J., says:

“If acts of an officer are to be regarded as unofficial whenever they are illegal, an official bond could serve no useful purpose, for there can be no breach so long as be performs bis duties according to law. It is only when some duty has been omitted or disregarded or improperly or illegally performed that a liability can arise.”

Tbe loan of tbe public moneys by tbe treasurer was itself a breach of tbe official bond and created a liability against the sureties, which could be discharged only by full restoration. There still remained a duty upon tbe state treasurer to recover ■ the state funds .and restore them to rightful custody.

Had a successor been appointed, can bis right and duty to recover tbe fund- with outstanding interest be doubted ? In tbe recovery and restoration of this fund by tbe treasurer, who made the loan, is be to be considered less an agent of tbe state and acting in official capacity?

Tbe cause of action does not, therefore, rest solely upon tbe illegal act of loaning tbe funds, but as well upon the duty of collecting and restoring them.

In tbe discharge of this official duty, it is illogical and unreasonable to say that be may restore part and retain part, and claim fulfillment, and tbe discharge of bis bond.

The petition, therefore, which alleges that McKinnon loaned the public funds, received interest thereon during his term of office, and failed to account for and turn over the same to his successor, shows a breach of the official bond, and constitutes a cause of action against the estate of McKinnon, as well as. the sureties upon his bond.

The second defense setting forth the settlement with the state auditor and his successor as state treasurer admits that no interest was included.

This defense is not sufficient. The treasurer by bis own statement to the auditor and to his successor can not furnish justification for his own release as to items not included. For aught that appears neither the auditor nor McKinnon's'successor knew of the omitted items. In any event the settlement could furnish no defense as to items not accounted for.

The judgment of the court of common pleas is, therefore, reversed and the cause remanded with instruction to overrule the demurrer to the petition and sustain the demurrer to the second defense.

Dustin, J.

(dissenting).

The opinion of the majority of the court is devoted chiefly to the proposition that the estate of William S. McKinnon is liable for the interest received by him on the funds of the state while he was treasurer.

In that I concur fully. Indeed, I think it is not seriously denied by anybody. It is a familiar principle that a trustee is liable for the profits made out of the trust fund in his hands.

If McKinnon had made a fortunate investment in stocks and realized a profit of a million dollars, I do not doubt that he or his personal representatives would be liable to the state for the whole of it.

But the situation is quite different as to his bondsmen. They are liable, of course, for any loss of the principal so invested; and, if the law had then permitted loaning as it does now, they would be liable for any interest obtained, up to the limit of their bond, because they would be presumed to. know the law and that such a liability might be incurred. But they can not be presumed to incur a risk of being liable for an increase that was illegal, and, hence, presumably impossible, to obtain.

As the law stood .at the time Mr. McKinnon’s bond was signed, the sureties were, in my opinion, liable for losses only — not for profits. There could be no profits legitimately obtained. The funds referred to in the phraseology of the bond were the funds already in the treasury and such as might legitimately be placed there. As the Supreme Court significantly remarks in State v. Pierson, 83 O. S., 245, “In contemplation of the law-makers, there never could be any interest. ’ ’

And in State v. Newton, 26 O. S., 275, an indictment against a county auditor for the embezzlement of public money alleged to have come into his hands, the court says: “If it was there at all, it was there without legal authority,” and quashed the indictment.

The case of Eshlby v. Board of Education, 66 O. S., 71, is referred to as conclusive. But it does not strike me as anything more than a new application of the old principle referred to above, viz., that a trustee, even for the public, is liable for profits. The bondsmen were not sued nor are they referred to in the Eshelby case, and the question here presented was not made to nor considered by the court; nor is there any dictum in the opinion that could fairly be applied to their situation. The phrase “the increment follows the principal” refers to the only question in the case, viz., the liability of the official.

The bondsmen are entitled to stand on the conditions of their bond, which, properly construed, it seems to me, cover losses only and not profits, which, in contemplation of law as it then stood, could never occur.  