#### NICHOLAS LAVECCHIA, Receiver for PAINE STATISTICAL CORPORATION, a Corporation of New Jersey, v. THE NORTH CAROLINA JOINT STOCK LAND BANK OF DURHAM.

(Filed 1 February, 1939.)

Money Received § 1 — Person accepting payment must have actual or constructive notice that the funds were misappropriated in order to he responsible.

While one who knowingly participates in the fruits of misappropriation is responsible therefor to the person owning the funds misappropriated, the person accepting the funds must have actual or constructive notice that the funds are misappropriated, and the acceptance of a check against funds of a corporation, executed for the corporation by its president, in payment of an obligation owed by the president of the corporation individually, is insufficient to put the payee on notice, and the receiver of the corporation is not entitled to recover such funds from the payee.

Appeal by plaintiff from Qowper, Special Judge, at November Civil Term, 1938, of Durham:.

Affirmed.

This was a civil action instituted by the plaintiff, receiver for Paine Statistical Corporation, a corporation of New Jersey, to recover certain funds expended by J. 0. Paine, president of Paine Statistical Corporation, in payment of certain alleged individual debts owed by J. 0. Paine to the defendant, North Carolina Joint Stock Land Bank of Durham, totaling $7,325, under certain contracts entered into by J. 0. Paine individually with the defendant North Carolina Joint Stock Land Bank. These payments were made by checks drawn on Paine Statistical Corporation.

The following is a copy of one of the checks given :

“Paine Statistical Corporation • No. 3708

Newark, N. J., March 3rd, 1937.

“Pay to the order of

N. C. Joint Stock Land Bank $5500.00

FIFTY-FIVE HUNDRED AND 00/100.DOLLARS

Paine Statistical Corporation

J. O. PaiNE, President.

“UNION National Bank

in Newark, New Jersey.”

(Endorsement on Check No. 3708)

“Deposit to the credit of North

Carolina Joint Stock Land Bank of Durham.”

*74Tbe judgment of tbe court below was as follows: “This cause coming on to be beard upon tbe motion of tbe plaintiff for a judgment on tbe pleadings, and tbe court being of tbe opinion tbat sucb motion should not be allowed: Now, therefore, it is hereby ordered, considered and adjudged tbat tbe motion of tbe plaintiff for judgment on tbe pleadings is denied. O. Y. Cowper, Judge, etc.”

To tbe signing of tbe foregoing judgment tbe plaintiff excepted, assigned error and appealed to tbe Supreme Court.

W. A. Lelancl McKeilhen, John D. McConnell, and Vidor S. Bryant for plaintiff.

8. C. Brawley and J. 8. Patterson for defendant.

OlabksoN, J.

Tbe complaint (paragraph 5) alleges, in part: “Tbat in giving said checks of Paine Statistical Corporation as payments for bis individual transactions, John Overton Paine misappropriated wrongfully and unlawfully used funds of Paine Statistical Corporation, of which misappropriation and wrongful use of funds defendant bad notice in tbat defendant accepted tbe said checks drawn on Paine Statistical Corporation, by John Overton Paine, in bis capacity as an officer of said corporation, which fully appears from tbe face of said checks, and tbat defendant thereby participated in tbe said misappropriation and wrongful use of said corporate funds and wrongfully received and now; unlawfully bolds tbe said funds of Paine Statistical Corporation, although demands for their return have been made by plaintiff.”

Tbe defendant in answer to tbe above allegation says: “It is admitted tbat tbe defendant accepted tbe checks of tbe Paine Statistical Corporation signed by John Overton Paine, president, and except as herein admitted all of tbe other allegations contained in paragraph 5 of tbe complaint are untrue and are denied.”

Tbe principle of law in Dancy v. Duncan, 96 N. C., 111 (117), is thus stated: “Tbe ease of Smith v. Fortescue, Busb. Eq., 127, fully warrants tbe present proceeding, and is almost a direct decision in favor of tbe judgment. Tbe conduct of 'Whitaker in bis voluntary participation in tbe wrongful disposal of tbe note, and appropriation of it to tbe executor’s own debt, renders him equally liable to be called on to restore tbe money to those thus defrauded. He will not be permitted thus to use trust funds when be is fully aware of their nature, or there are circumstances to awaken suspicion and put him on inquiry. Tbe authorities upon tbis point are numerous, and we refer to 1 a few. Exum v. Bowden, 2 Ired. Eq., 281; Wilson v. Doster, 7 Ired. Eq., 231; Lemly v. Atwood, 65 N. C., 46.” Ruffin v. Harrison, 90 N. C., 569; see Mfg. Co. v. Bell. 193 N. C., 367.

*75It is well settled tbat be wbo knowingly participated in tbe fruits of tbe misappropriation is responsible. Tbe complaint alleges tbat tbe only notice plaintiff bad was tbe fact tbat tbe checks were signed “Paine Statistical Corporation, J. C. Paine, Prest.” We do not tbink tbat tbis was sufficient to put defendant on notice tbat tbe checks were not bona fide. Any other rule would hamper seriously business transactions of tbis kind which are carried on every day. There must be actual or constructive notice before liability would attach to one wbo takes a check of tbe kind given in tbis ease. Bank v. Crowder, 194 N. C., 312.

In R. R. v. Kitchin, 91 N. C., 39 (44), it is said: “Where one of two persons must suffer loss by fraud or misconduct of a third person, be wbo first reposes tbe confidence or by bis negligent conduct made it possible for tbe loss to occur, must bear tbe loss.” Bank v. Liles, 197 N. C., 413; Lightner v. Knights of King Solomon, 199 N. C., 525; Shuford v. Brown, 201 N. C., 17 (24); White v. Johnson & Sons Co., 205 N. C., 773; R. R. v. Lassiter & Co., 207 N. C., 408 (415).

For tbe reasons given, tbe judgment of tbe court below is

Affirmed.