Appeal from the District Court of the United States for the Middle District of Pennsylvania; Albert L. Watson, Judge.
Before DAVIS and THOMPSON, Circuit Judges, and DICKINSON, District Judge.
Designating the parties as they stood in the District Court, the plaintiff has appealed from an order of the District Court dismissing its bill in equity in which it sought to be subrogated to certain alleged rights of the borough of Ashley, school district of Ashley, and county of Luzerne, Pa., hereinafter called the tax districts, against the defendant.
There are two questions at issue. The first one is whether or not the tax districts have any rights against the defendant to which the plaintiff could be subrogated, and the second is whether or not the plaintiff has shown that it is entilted to subrogation by showing that as between the defendant and itself the defendant should bear the loss here involved.
The facts are as follows: From 1918 to and including 1929, Thomas Henichek was tax collector for the tax districts. As such, he furnished an official bond each year on which the plaintiff was surety. The condition in these bonds was that Henichek "shall and will well and truly, collect and pay over, account for, according to law, the whole amount of taxes charged and assessed in the Duplicates which shall be delivered to him and faithfully discharge the duties appertaining to the office of Collector of Taxes. * * * " In 1927 the principal amount of his official bond was $20,000, in 1928 it was $30,000, and in 1929 it was $35,000.
John M. Jones was the plaintiff's general agent in the tax districts, and had been such for about ten years. He passes on the risk, received payment of premiums, delivered the bonds, and performed other duties of a general agent.
It appears that Henichek deposited all of the taxes collected by him in the defendant bank in an account designated "Thomas Henichek, Jr., Tax Collector," and that the defendant knew that all of the money deposited in that account was for taxes.
The evidence indicates that Henichek was often late in settling the tax duplicates, and while there is no proof that he ever acted dishonestly, it does appear that he did not or could not collect all of the taxes assessed. A practice developed, of which the plaintiff was aware through its agent, Jones, whereby the defendant would loan Henichek money each year on short term notes to enable him to pay the delinquent taxes to the tax districts and thus clear up the duplicate for the previous year. In 1924, the defendant loaned him $6,000; in 1925, $8,000; in 1926, $12,500; and in 1927, $18,000. The defendant deposited the proceeds of these loans in the "tax collector" account, and when the notes became due, it charged them to the same account. In 1928 Henichek was unusually late in clearing his duplicate for 1927, and there was $39,154.94 in taxes uncollected on the 1926 and 1927 duplicates. On October 3, 1928, the borough of Ashley appointed a committee to consult Jones and to ascertain the procedure necessary to collect from the plaintiff the balance due on the duplicates. This committee reported five days later that Jones had informed it that procedure against the plaintiff would not yield results for two years. It also reported that it had discussed the matter with the deputy controller and the solicitor for the county commissioners for Luzerne county, and that Henichek had requested that he be given two weeks' time to settle, ascribing his delay to the failure of many taxpayers to pay their taxes. W. A. Edgar, treasurer for the borough of Ashley, cashier in the defendant bank, and subagent for Jones, discussed the matter further with Jones and informed him that the bank was considering making a loan to Henichek in the sum of $25,000, on the security of the uncollected taxes on the 1926 and 1927 duplicates. On October 20, 1928, the bank loaned Henichek the $25,000 on three thirty-day notes, and, according to its custom, deposited the money in the "tax collector" account. Henichek then paid the tax districts and cleared his duplicates for 1927. On the date the notes became due, the bank charged them to the same account, thereby receiving payment in full.
It does not appear clearly from the record whether or not Henichek or his successor ever thereafter collected an amount equal to the loan on the 1926 and 1927 duplicates. It does appear, however, that by 1931 there was a shortage in Henichek's account on the 1927 duplicate of only $340.54.
In 1931, the plaintiff paid the tax districts sums amounting to $36,193.73 for shortages in Henichek's account. This sum included shortages of $340.54 in the duplicate for 1927; $23,039.14 and $4,440.94 on the duplicate for 1928; and $8,373.11 on the duplicate for 1929. The plaintiff was able to collect $7,603.15 from property and liens assigned to it by Henichek, and thus reduced its loss to $28,590.58.
On November 13, 1934, the plaintiff filed its bill in equity in the District Court, in which it sought to be subrogated to certain alleged rights of the tax districts against the defendant. It alleged that the defendant had participated in a breach of trust by charging the loan of $25,000 which it described as "personal obligations" of Henichek, to the "tax collector" account knowing that this account contained only tax money. It also alleged that the defendant had permitted Henichek to withdraw $1,632 for his own use.
The District Court found that there was no evidence relating to the alleged misappropriation of the $1,632, and, without deciding whether or not the tax districts had any rights against the defendant, held that the plaintiff had not shown that as between it and the defendant, the defendant should bear the ...