(Arthur E. Sutherland, of Rochester, N. Y., of counsel), for defendant Superintendent of Insurance.

Martin T. Nachtmann, of Albany, N. Y., for defendant Metropolitan Life Ins. Co.

COOPER, District Judge. This suit is brought by the plaintiff as receiver of the First National Bank of Warren, Mass., to impress a trust in favor of the bank upon funds amounting to $39,130.08 in possession of the defendant superintendent of insurance. The money arises from the sale of securities stolen February 6, 1923, from the Massachusetts Bank by one Joseph B. Marsino, who controlled that bank, and sold February 7, 1923, at Buffalo, N. Y., and the proceeds of the sale on the same day paid directly to the Niagara Life Insurance Company of Buffalo, which Marsino, together with his father-in-law, one Abraham Goldman, also controlled through the control of the Bison Holding Company, which held the majority of the stock of the Niagara Company. The present superintendent of insurance was substituted as a party defendant in place of the former superintendent, who was acting as such during all of the occurrences out of which this suit arises. The present receiver of the Warren bank was also substituted as party plaintiff in place of the receiver first appointed February 23, 1923, but who resigned after the commencement of this action. All references herein are to the former superintendent of insurance, who will be called the defendant superintendent, and to the former receiver, who will be called plaintiff receiver.

Facts.

The evidence in this case is somewhat lengthy and involved, and only the salient facts will be stated at this time.

Marsino, some time in the year 1922, acquired control of the Bison Holding Company of Buffalo, which owned the controlling interest in the Niagara Company. On May 15, 1922, his control of the Niagara Company became effective. He thereupon persuaded Burke, a former president, to again become the president of the Niagara Company, and installed two of his representatives in the office of vice president and secretary and treasurer. Marsino's control of the Niagara Company was known to the defendant superintendent. On or about the 4th day of October, 1922, under Marsino's direction, the by-laws were changed so that the checks no longer had to be signed by the president, whom he could not

control, but could be signed by the vicepresident and by the secretary, treasurer, or any other officer of the company. About this time various local Buffalo people resigned as directors or attorneys or otherwise in connection with this company. Abraham Goldman, Marsino's father-in-law, and other representatives of Marsino, were elected directors. Marsino resigned as director at the request of the defendant superintendent, and was elected general superintendent of agencies. Copies of such change of by-laws and all resolutions and elections and formal actions by the Niagara Company were duly sent to the superintendent.

Marsino also controlled the Warren National Bank of Warren, Mass., which control he acquired January 9, 1923, but this control was apparently unknown to the defendant superintendent.

Marsino also controlled the Mechanics' & Merchants' Bank of Philadelphia, a small and new concern, which opened for business December 26, 1922, but the extent of Marsino's control of this bank was probably not fully known to the superintendent or his representatives until February 5, 1923.

During the summer and fall of 1922, Francis E. Bagot, an attorney and director of the company, Louis L. Babcock, of the firm of lawyers who were then attorneys for the company, F. J. La Guardia, a lawyer from New York, and Burke, president of the company, at various times told the superintendent personally and told his representatives, that Marsino was reliably reported to be a man with a very unsavory record, that there was danger that the funds and securities of the company would be jeopardized if he were permitted to control its affairs.

The defendant superintendent sent his representatives at different times to keep in touch with the affairs of the company. On January 16, 1923, he sent a representative, Mr. Streeter, to Buffalo, to notify the officers of the Niagara Company that no checks should be drawn on funds of the Niagara Company without the approval of Mr. Streeter noted on the check. Mr. Streeter then learned that approximately $100,000 of the company's funds had been deposited, at different times, in the Mechanics' & Merchants' Bank at Philadelphia, of which the New York state insurance department was already suspicious, and about January 19th or 20th notified Mr. Hadley, New York state chief examiner of life insurance companies, representing the superintendent of insurance.

About February 1, 1923, Mr. Hadley learned that a total of about $200,000 of the Niagara Company's money had been transferred to this Mechanics' & Merchants' Bank. On February 5, 1923, he learned that about all of the Niagara Company's deposits had been loaned by the bank on notes which are called dummy notes, and most, if not all, of the sums loaned thereon had presumably passed to Marsino, and that the bank was insolvent. Marsino does not appear to have been indorser on any considerable number of the notes, but some of them bear the indorsement of his vice president or secretary and treasurer of the Niagara Company and of others, either fictitious persons, or persons acting for him. The only collateral for the notes was stock of the Niagara Life Insurance Company.

About February 1, 1923, Mr. Hadley representing the defendant superintendent, had decided to apply to the court for an order under section 63 of the Insurance Law (Consol. Laws, c. 28) to take possession of the property and affairs of the Niagara Company, and papers were in course of preparation for that purpose when, on February 2, 1923 Powell, counsel for the company, came to Hadley at a hotel in Buffalo and asked if application was intended by the department to take over the affairs of the Niagara Company. Upon receiving an affirmative answer, Powell asked for a delay of two days, saying that "we" can take care of the Philadelphia bank matter. The extension was granted, but nothing was done. On February 5th Marsino's father-in-law, Goldman, a director of the Niagara Company, was brought to Hadley at Buffalo by Francis E. Bagot, acting for the Niagara Company, and endeavored to prevent or delay such action. Goldman was represented to Hadley as a wealthy man who wanted to save the value of his Bison Holding Company stock and to help Marsino, who was also a large holder of the Bison Company stock. Goldman was informed by Hadley that, if he would procure $40,000 in securities to aid the treasury of the Niagara Company, Hadley would withhold the taking of such action for a week. Goldman asked for delay, claiming that friends of Marsino were coming from New York to Buffalo and would bring some money with them in about two days. Hadley declined to wait two days. Goldman then said he had marketable securities of his own in Chicago, and told in a general way what they were, and asked for time to go to Chicago and get them. Hadley, after consul

tation, said he would not wait for Goldman to go to Chicago and bring back the securities, but that he would go to Chicago with Goldman to get them, and, after some objection on the part of Goldman, they both went to Chicago on the 5th day of February, 1923, and arrived in Chicago on February 6, 1923. Upon arrival in Chicago Goldman did not have the securities which he represented that he had, and offered equity in real estate, which Hadley refused. Goldman's wife then came and said, in the presence of both men, that she had sent the securities to Marsino at Buffalo, according to the testimony of Hadley, but not confirmed by any other witness.

Hadley says he did not believe this, and telegraphed to the representatives of the defendant superintendent of insurance in Buffalo to start the machinery to take possession of the Niagara Company. On the same day, February 6th, an order to show cause was obtained from Supreme Court Judge Dudley at Buffalo, returnable February 7th. Hadley arrived in Buffalo the morning of February 7th, and with other representatives of the defendant superintendent of insurance was informed by Attorney Bagot, claiming to represent Burke, president of the company, and by Powell, counsel for the Niagara Company, that Marsino had about $41,000 of bonds which he would turn over to the company to prevent or defer the taking possession of the property and affairs of the Niagara Company by the superintendent of insurance, if time was given for the obtaining of more money for the Niagara Company. Fowler objected to taking the bonds, and advised immediate action to take possession of the Niagara Company. After some discussion between Hadley. Streeter, Fowler, and Montesano, the latter also an attorney for the superintendent of insurance, on the one hand, and the attorneys Bagot and Powell on the other, in which, by the weight of evidence, Fowler made the statement that it was not wise to take the securities, as they might have been stolen, it was determined by Hadley that the bonds should not be placed in the company's treasury, but that, if the securities could be sold that day and the proceeds paid directly to the Niagara Company the same day, the application to take possession would be deferred for a week.

No inquiry was made of Marsino by any one as to the source or ownership of the bonds. Hadley and Burke, the president of the Niagara Company, went with Marsino, who had the securities, to the office of

O'Brien, Potter & Co., local brokers, and under Hadley's direction arrangement was made to have the securities sold and the proceeds paid the same day by the broker's check directly to the Niagara Company, which was done. Hadley arranged with Marsino that the executive committee of the board of directors of the Niagara Company should pass a resolution authorizing the Niagara Company to deliver to Marsino one of the certificates of deposit issued to the Niagara Company by the said Mechanics' & Merchants' Bank of Philadelphia for $25,000 and a check on the Niagara Company's account in that bank for $14,130.08, the remainder of the proceeds of the sale of the bonds. Powell raised the question that this disposing of the property of the Niagara Company was contrary to the terms of the injunction contained in the order to show cause of February 6, 1923, issued by Supreme Court Judge Dudley, which was returnable on the 7th and had been adjourned. Fowler refused to consent to any modification of the injunction, but the superintendent was called on the long distance telephone and told of the question raised, and, after consultation with Hadley, he advised that the executive committee should go ahead and pass the resolution and give the certificate of deposit and check to Marsino, and he (the superintendent) would see that no proceedings for contempt of court were instituted against the officers or the committee of the company, and sent a confirming telegram upon request of Burke. The resolution was then passed, and the certificate of deposit and check delivered to Marsino, who subsequently received from the Philadelphia bank notes signed by various individuals which had been discounted through his procurement, amounting to about $39,000.

About February 19, 1923, officials of the Warren National Bank opened the box in which its securities were kept and found the whole thereof, amounting to about $200,000, gone, and a memorandum signed by Marsino dated February 6, 1923, stating that the securities had been taken by him for the Bison Holding Company for sale for the account of the Warren bank. This taking was a theft of the bonds by Marsino. A receiver of the Warren bank was appointed February 23, 1923.

No more money or property was put into the treasury of the Niagara Company by anybody, and on February 23d an order was granted by Supreme Court Judge Hinckley, returnable on the same day at 4 p. m., requiring the Niagara Company to show cause

why its affairs should not be liquidated, and why the court should not approve a contract of reinsurance, which had in the meantime been made by the defendant superintendent with the Metropolitan Company, under which the Metropolitan Company would take over the assets of the company, assume its liabilities, and reinsure most of its policy holders. The daily papers of Buffalo on the 22d, 23d, and 24th of February, 1923, contained long articles on the first page, in big headlines, stating that bonds had been stolen from the Warren bank at Warren, Mass. by Marsino, and that some of them had been sold through Buffalo brokers O'Brien, Potter & Co., and the proceeds of the sale had been turned over by Marsino to the Niagara Company.

When the matter came up in court on the afternoon of the 23d, Assistant United States Attorney Selby Smith appeared in court, as a friend of the court, to use his own language, stating that he had been informed by the receiver of the Warren bank that about $41,000 worth of the bonds claimed to have been stolen of the Warren National Bank of Warren, Mass., had been sold and the proceeds turned over to the Niagara Life Insurance Company by a check of O'Brien, Potter & Co.; that these bonds had been disposed of in the presence of some representative of the defendant superintendent. Smith suggested that the court should at least delay matters a few days until he could receive definite instructions from the Attorney General of the United States as to whether or not he desired the institution of a suit to restrain the transfer of the proceeds of these $41,000 of bonds from the Niagara Company to the Metropolitan Company. Mr. Fowler, the representative of the superintendent, was in court on that day, and knew of the statement made by Mr. Smith, but did not recall that anything was said that the bonds had been sold through O'Brien, Potter & Co. The defendant superintendent was also in court, and heard the statement made by Mr. Selby Smith.

The court delayed one day, but on the morning of February 24th granted the order of liquidation and approval of a contract between the superintendent and the Metropolitan Company, despite the objection of Mr. Vaughan, an attorney of Buffalo, representing the plaintiff receiver, who gave notice that the receiver claimed the proceeds of the sale of the bonds. Mr. Fowler, attorney for the superintendent, was present. After the granting of the or

der, the superintendent left Buffalo on the same day on the Empire State Express, which leaves Buffalo at about 1 o'clock p. m. for New York, having arranged that Mr. Hadley and a representative of the Metropolitan Company should meet him in New York on the arrival of the train at 10 o'clock p. m. on Saturday night, February 24th. He did not find them at the station but at his house in New York City, and about an hour after his arrival he signed the contract of insurance, which had been signed by Mr. Ecker, the vice president of the Metropolitan Company during the afternoon of the same day. The New York Times and the New York Tribune of February 24th contained leading articles on the first page, in large headlines, to the same effect as the statements in the Buffalo papers of February 22d, 23d, and 24th. There had also been similar articles in the issues of the previous two or three days in the New York papers.

About 3 o'clock in the afternoon of February 24th the receiver of the Warren bank sent from Boston, Mass., telegrams to the superintendent of insurance at Albany and the Metropolitan Life Insurance Company at its offices in New York City, notifying them that the receiver of the Warren bank claimed that the proceeds of bonds stolen from the Warren bank were in the treasury of the Niagara Company. A letter to the same effect was sent in the forenoon of the same day from Buffalo by the assistant United States attorney to the Metropolitan Company at its New York office. The plaintiff sent a similar letter the same day to the defendant superintendent. The telegram and letter to the superintendent of insurance was not received by him until the 26th in New York. It is not denied that the letter to the Metropolitan Company was received on February 26th. It is claimed the company has no record of the receipt of the telegram. The contract did not permit the Metropolitan Company to take over the assets of the Niagara Company until four days after the 24th, namely the 28th. The receiver apparently thought that leave of the Supreme Court of the state of New York was necessary to bring this suit, and the suit was brought as soon as leave was obtained. The papers were duly served prior to March 12, 1923. Up to March 12, 1923, the Metropolitan Company had not received the said $39,130.08, and, so far as appears in the testimony, has never received, and the money is still in the custody of the defendant superintendent.

The plaintiff sues to impress a trust upon the said moneys in the possession of the superintendent, on the ground that Marsino was acting as agent of the company in procuring the stolen bonds, and that the Niagara Company could not receive the bonds nor retain the $39,130.08, proceeds of the sale thereof, without assuming the burden of its agent's knowledge that the bonds were stolen; that even if Marsino were not the agent of the company in procuring the bonds, nevertheless the company, the defendant superintendent, and his agents, had such knowledge of Marsino that they should have known that the bonds were stolen, or should have made inquiry to ascertain the source of the bonds, and are therefore chargeable with knowledge; also that the proceeds of the bonds were not acquired in good faith for an adequate consideration or in the regular course of business; that the Niagara Company consequently holds the same

plaintiff.

as trustee ex maleficio for the

The present defendant superintendent of insurance asserts, as did the former superintendent, that the plaintiff must fail because (1) neither the then defendant superintendent nor the Niagara Company officials, other than Marsino, had any knowledge that the bonds were stolen, and that there was no notice, either actual or constructive, charging them with any knowledge or putting them to inquiry; (2) the Niagara Company took the moneys resulting from the sale of the bonds in partial settlement of an obligation from Marsino to the Niagara Company; and (3) that the Niagara Company gave a present, valuable, and adequate consideration for the $39,130.08.

The Metropolitan Company makes the additional defense that it is an innocent purchaser in good faith without notice, relying on the order of the court, and that its equity is greater than that of the plaintiff, and that it should not be deprived of these moneys for the benefit of the plaintiff.

[1] It is well settled that a principal is chargeable with the knowledge which the agent acquires while acting within the scope of the agent's authority. Curtis Co. v. U. S., 262 U. S. 215, 222, 43 S. Ct. 570, 67 L. Ed. 956; American Nat. Bank v. Miller, 229 U. S. 517, 33 S. Ct. 883, 57 L. Ed. 1310; Fishkill Sav. Inst. v. Nat. Bank of Fishkill, 80 N. Y. 162, 36 Am. Rep. 595; Atlantic Cotton Mills v. Indian Orchard Mills, 147 Mass. 268, 273, 17 N. E. 496, 9 Am. St. Rep. 698.

[2] It is also the law that, where one re

ceives benefit from the wrongful act of another, and retains the benefit of the wrongful act, after the discovery thereof, he will be deemed to have adopted the wrongful act, or, in other words, when he takes the benefit he takes it subject to the knowledge of the acts by which the benefit was obtained. Fairchild v. McMahon, 139 N. Y. 290, 295, 34 N. E. 779, 36 Am. St. Rep. 701; Fishkill Sav. Inst. v. Nat. Bank of Fishkill, 80 N. Y. 162, 36 Am. Rep. 595; Rockey River Develop. Co. v. German-Amer. Brewing Co., 193 App. Div. 197, 184 N. Y. S. 155; Taylor v. Commercial Bank, 174 N. Y. 181, 188, 66 N. E. 726, 62 L. R. A. 783, 95 Am. St. Rep. 564; Atlantic Cotton Mills v. Indian Orchard Mills, 147 Mass. 268, 275, 17 N. E. 496, 9 Am. St. Rep. 698; Curtis Co. v. U. S., 262 U. S. 215, 224, 43 S. Ct. 570, 67 L. Ed. 956.

[3] It must be taken as true that Marsino stole, from the Warren bank, on February 6th, bonds of which the $41,000, sold in Buffalo on February 7th for $39,130.08, were a part. If he were the agent of the Niagara Company in procuring the bonds which were sold, and the proceeds paid to the Niagara Company, that company should be chargeable with knowledge that they were stolen, and that he was not the right ful owner. It is, of course, true that he had no previous specific, formal authorization by the Niagara Company to get any bonds or moneys for that company. But the state superintendent of insurance was about to apply to the court for an order to take the Niagara Company from the hands of its officers, because of the worthlessness of the deposits of the Niagara Company in the Mechanics' & Merchants' Bank in Philadelphia. Hadley, the defendant superintendent's chief examiner, told Goldman, a director and stockholder of the company and the father-in-law of Marsino, that he must procure for the Niagara Company $40,000 worth of negotiable securities to secure delay for a week in which further betterment of the affairs of the Niagara Company might be had. This information was given on February 5th. Both Goldman and Marsino knew that Goldman had no securities of value in Chicago-Goldman's whole activity was for the purpose of gaining time. Not only did Goldman and Marsino know that something must be done, but Powell, counsel for the company, and Bagot, an attorney connected with the company, and Burke, the president of the company, all knew the situation of affairs. Marsino controlled the company, its administra

tive officers and executive committee, except Burke.

While Goldman went with Hadley to Chicago on the 5th to gain time, Marsino went on the same day to Warren, Mass., and on the 7th arrived back in Buffalo with $41,000 of negotiable bonds which he had stolen from the Warren bank on February 6th. On the same morning Hadley arrived from Chicago. They were all trying to meet the demands of Hadley to prevent the Niagara Company from being taken out of their hands. On the morning of the 7th, Bagot, Powell, Burke, and Marsino, all of the Niagara Company, knew that Marsino had produced these bonds and urged Hadley to consent that the company take the bonds for the company and defer the application. Hadley, upon the objection of Fowler that the bonds might have been stolen, preferred to do it another way, and decided, as they were negotiable securities, the bonds must be sold and the proceeds paid into the treasury of the Niagara Company, without inquiry upon the part of Hadley or any one else as to where Marsino got the bonds. By its acceptance of the moneys, the Niagara Company ratified all the acts of Marsino, and became chargeable with his knowledge.

Moreover, after the receipt of the moneys, the executive committee of the Niagara Company, which had full authority, passed a resolution accepting the money and directing the delivery of the certificate of deposit on the Philadelphia bank for $25,000 and a check upon upon the company's supposedly worthless account in the same bank for the remainder of the proceeds of the sale of the bonds. Here was formal ratification of Marsino's act in procuring the bonds and selling them and delivering the proceeds to the Niagara Company. By the receipt of the moneys and the formal ratification of the act of Marsino, Marsino became the agent of the company, with the same effect as if the company had passed a resolution in advance, authorizing Marsino to go out and obtain bonds or moneys to tide over the affairs of the company. With such a relation of agency existing, the company, not having acquired the bonds nor the proceeds of the sale thereof in good faith for an adequate consideration without notice and in due course, was chargeable with the knowledge of its agent Marsino that the bonds were stolen, and it held the moneys as a trustee ex maleficio for the benefit of the true owner of the bonds, the Warren bank and its receivers.