
    William C. Greene, as Receiver of The Merchants’ Bank of Lockport, Respondent, v. The County of Niagara, Appellant, Impleaded with Timothy E. Ellsworth and Others, Defendants.
    
      County moneys illegally loaned by a county treasurer—securities taken by Mm arc impressed with a trust infaxor of the county — a county treasurers overdA'aft at a-bank is his individual liability.
    
    Arnold, the county treasurer of Niagara county, loaned to a bank certain of the county moneys and took the note of the president and vice-president of the bank, payable to his order, ana a draft upon a third person, which, on the 10tli day of October, 1893, he aelivered to one Ellsworth, his successor in office, who collected and held the proceeds thereof. Prior to the expiration of his term of office, Arnold had been permitted by the bank to overdraw his account as county treasurer, and on the 11th day of October, 1893, he executed to the bank an assignment of the note and draft.
    
      In an action brought by the receiver of the bank to recover from Mugara county enough of the avails of the note and draft to pay the overdraft,
    
      Held, that as Arnold, as county treasurer, had no right to loan, and the bank had no right to receive the county moneys, the debt thus created must be treated as one due to the county, and that Arnold took the note and draft impressed with a lien in favor of, and a trust requiring him to use them in restoring to, the county the moneys thus illegally loaned;
    That the overdraft by Arnold was in the nature of a loan to him individually, as he had no right to borrow money upon the security of the county, and the proceeds of the securities held by him in trust for the county could not be used to make good his individual obligation to the bank.
    Appeal by the defendant, The County of Niagara, from a judgment of the Supreme Court in favor of the plaintiff, entered in the office of the • clerk of the county of Niagara on the llth day of April, 1896, upon the report of the referee.
    
      John H. Leggett, for the appellant.
    
      David Millar, for the respondent.
   Adams, J. :

The established facts in this case disclose that, upon the 16th day of October, 1893, the plaintiff was duly appointed receiver of the Merchants’ Bank of Loclcport, and that upon the 19th of January, 1894, he took possession of the assets and property of tli'e bank and still retains the same in his custody; that prior to March 1,1890, the Merchants’ Bank was known as “ The First National Bank of Lockport,” but that upon that date it was changed from a National to a State organization; that, for six yeaz’s prior to the apjzointznezzt of such receiver, one John J. Arnold was the treasurer of Niagara county, and had deposited the county funds in either the Merchants’ Bank or the Fiz’st National Bazzk, of each of which he was the cashier; that at the time the bank was changed frozn a National to a State organization it held certain commercial paper which, for sozno reason, it was thought necessary or. desiz’able to retire, and which amounted to $12,000 or $15,000. Certain officers of the bank thereupon applied to Arnold to loan them, frozn the county funds, a sufficient sum to take up this paper, which application was granted.

Thereafter J. S. Helmer and J. H. Helmer, who were respectively the president and vice-president of the bazrk, delivered t.o Arnold their note for $4,669.31, payable to his order, and later on J. II. Helmer drew his certain draft for $5,130.10 upon Charles L. Easton, of Chicago, Illinois, payable to the order of the Merchants’ Bank of. Lockport, which draft was also delivered to Arnold, and that, together with the note, was accepted by him as security for, or in payment of, the moneys which the bank had theretofore borrowed of him.

This note and draft were placed by Arnold in a pocket book containing valuable papers belonging to the county of Niagara, which,, thereafter, and upon the 10th of October, 1893, was, with its contents, delivered to the defendant Ellsworth.

In 1893, and prior to the eleventh of October in that year, Arnold' had been permitted by the bank to overdraw his account as treasurer to the extent of $6,428.83, and upon the last-mentioned date, when the insolvency of the bank had become pretty well established, Arnold was induced to execute an assignment to it of the Helmer' note and Easton draft, which were subsequently paid to the defendant Ellsworth, the avails thereof being held by him until it could be determined to whom they belonged.

This action is brought upon the theory that the note and draft in question were assigned to the bank as security for Arnold’s overdraft, and that their avails, or so much thereof as may be necessary for' that purpose, should be applied in payment of such overdraft. And the learned referee has found as a conclusion of law, that the plaintiff, as receiver, is entitled to enough of such avails to make good the overdraft and the interest thereon, the remainder thereof' being awarded to the defendant, the county of Niagara.

We are unable, after giving to this case a most careful and critical examination, to reach a conclusion which harmonizes with that of the learned referee. It is, of course, too plain for controversy, and no one has been heard to say to the contrary, that the original transaction between Arnold and the bank, which resulted in the-loan of a sum of money from the former to the latter, sufficient in amount to retire the.objectionable paper, was, to put it very mildly, without authority, and in violation of Arnold’s duty as treasurer of' the county of Niagara. The money loaned, confessedly, belonged to the county, and not to him, and he had no more right to loan it to the bank than he had to invest it in stocks. This the officers of' the bank doubtless knew as well as he, and both the parties must. have been conscious that the entire transaction was illegal, if not criminal, in its character.

Now, this fact, while it prevents the plaintiff, who, so far as this action is concerned, stands precisely where the bank would have stood if no receiver had been appointed, from invoking the aid of a court of equity in his attempt to obtain any benefit from a transaction which was clearly dishonest, is, nevertheless, one which should make the court anxious and alert to so mold the relief to be awarded, as to adapt it to the circumstances of the case, and prevent, if possible, any harm or loss resulting to the county of Niagara, whose funds have been thus improperly diverted. (Story’s Eq. Juris. § 1258; Perry on Trusts, § 829; Lench v. Lench, 10 Ves. 511; Lewis v. Madocks, 17 id. 48.)

The view, therefore, which we are inclined to take of the matter is that, notwithstanding the bank borrowed the money of Arnold personally, and transferred the note and draft to him individually, yet, inasmuch as it was well known to the officers who procured the loan that the moneys belonged to the county, and not to Arnold, the debt must be treated as one owing to the county; and that, consequently, when Arnold took the note and draft, either in payment of, or as security for, the money thus loaned, he took them impressed with a lien and trust, for the purpose of recompense and restitution of the moneys illegally loaned, and could not divert them to any other use without the consent of the county. In other words, the note and draft represented and stood in the place of so much money which had been virtually embezzled, and as the money belonged to the county, so did the securities which represented it. (Newton v. Porter, 69 N. Y. 133; Ferris v. Van Vechten, 73 id. 113 ; Cook v. Tullis, 18 Wall. 332.)

In this view of the case it becomes unimportant whether or not the note and draft were delivered to the defendant Ellsworth, to be held by him in trust for the county; because Arnold had no right to execute the assignment of October eleventh, and the bank acquired no additional right in consequence of its execution.

There is, however, another reason why we think the avails of this note and draft should not be employed in the manner directed by the learned referee, which is that the overdraft in question was in the nature of a loan to Arnold, individually. He, as treasurer, had no right to borrow money upon the credit of the county of Niagara, and when the bank allowed him to overdraw his account, it was upon his individual responsibility. Of course, if Arnold had in good faith used his personal credit to obtain moneys to pay the obligations of the county, it is not altogether improbable that the count would be required to reimburse him therefor. But, as between him and the bank, it was wholly a personal matter in which the county had no concern.

Again, in a proper case and under certain conditions, it is not inconceivable that a court of equity might deem it advisable to apply the avails of the note and draft to the payment of the overdraft, but before doing so it would at least require it to be established beyond peradventure that the same was in all respects bona fide; that the county had received the full benefit of it, and that, as between Arnold and the bank, there were no existing equities to be considered and adjusted. But the facts here presented do not establish a case for the application of any such equitable principle, and we consequently think the learned referee reached an erroneous conclusion which makes it necessary that a new trial of the case should be had.

All concurred.

Judgment reversed and a new trial ordered, with costs to abide the event.  