The supreme court of North Carolina has held that a statute authorizing the issuance of bonds, and providing that they should be exempt from all state, county, or municipal taxation or assessment, direct or indirect, and providing further that the bonds or coupons shall not be subject to taxation "when constituting a part of the surplus of any bank, trust company, or other corporation," required the deduction of the amount of the surplus of a bank invested in such bonds in estimating the value of the shares of stock for assessment to the stockholders, although the statute relating to the fixing of the valuation of such shares for purposes of taxation provided merely for the deduction of the assessed value of the real and personal property on which the bank had paid taxes. Pullen v. Corporation Commission (1910) 152 N. C. 548, 68 S. E. 155. The court says: "It seems to us in our scheme of taxation the word 'surplus' has a distinct legal signification, and it must have been used with that signification in the act now under review, by the legislative branch of the government, which has created and established our taxing system, and which alone has the power to do so. Unless we so interpret the statute, we shall fail to give any force and effect to this language. This we cannot do, under a well-settled rule of statutory interpretation. These words were not needed, in addition to the other clear and unambiguous language of the section, to exempt these bonds from taxation as the property of a bank, whether consisting of a part of its capital, surplus, or undivided profits; the other words of the statute were plenary for this purpose." The deduction was allowed only when the bonds constituted a part of the surplus of the bank. If a part or all of the capital stock or undivided profits had been invested in the bonds, the claim of the shareholders for a deduction was held not sustainable. In view of the fact that, if the statute imposes a tax upon the capital stock of the bank or other corporation, United States securities held must be deducted in arriving at the taxable value, whereas if the tax is on the shares no such deduction need be made, it becomes important to know when the tax is upon the capital stock and when upon the shares. The general question of when a taxing statute levies the tax on the shares of stock, and when on the capital stock, is beyond the scope of this annotation, but, in view of the importance of the question in its bearing on that under annotation, the holdings thereon in the cases in point on the question of deduction will be set out. c. Character of statute as levying tax on shares or on capital stock. The supreme court of Iowa held a statute declaring that "shares of stock of state and savings banks and loan and trust companies shall be assessed to such banks and loan and trust companies, and not to the individual stockholders," to impose a tax upon the shares of stock, and therefore that the amount of money invested in United States bonds need not be deducted. German American Sav. Bank v. Burlington (1902) 118 Iowa, 84, 91 N. W. 829; Security Sav. Bank v. Carroll (1905) 128 Iowa, 230, 103 N. W. 379. This was followed by a Federal circuit court. People's Sav. Bank v. Layman (1905; C. C.) 134 Fed. 635. But the Supreme Court of the United States held that this statute imposed a tax upon the capital stock or property of the corporation, as distinguished from a tax upon the shares of stock, and therefore that United States bonds held by the banks must be deducted in arriving at the taxable value of the bank's property. Home Sav. Bank v. Des Moines (1906) 205 U. S. 503, 51 L. ed. 901, 27 Sup. Ct. Rep. 571. Subsequently the legislature changed the statute by providing that the shares of stock "shall be assessed to the individual stockholders," but the basis of value for taxing purposes was left the same, and a Federal district court held that a tax levied under the changed statute was in effect on the property of the bank, hence United States Liberty bonds held by the bank must be deducted. Iowa Loan & T. Co. v. Fairweather (1918; D. C.) 252 Fed. 605. But in a subsequent case the circuit court of appeals for the eighth circuit held that the changed Iowa statute imposed a tax upon the shares of state banks, and not upon their capital. Hannan v. First Nat. Bank (1920; C. C. A. 8th) 269 Fed. 527 (appeal dismissed per stipulation in (1924) 266 U. S. 638, 69 L. ed. 482, 45 Sup. Ct. Rep. 9). The mere fact that the capital, surplus, and undivided earnings of the bank are made the measure of value of the shares for taxation, and that the bank is required primarily to pay the tax on the shares, does not show that the assessment is upon the property of the bank rather than upon the stockholders' shares. Des Moines Nat. Bank y. Fairweather (1923) 263 U. S. 103, 68 L. ed. 191, 44 Sup. Ct. Rep. 23. The statute which was held in Cleveland Trust Co. v. Lander (1900) 10 Ohio C. D. 452, 19 Ohio C. C. 271, to impose a tax on the shares, read: "Be it enacted by the general assembly of the state of Ohio that all the shares of the stockholders in any bank or banking association located in this state whether now or hereafter incorporated or organized under the laws of this state or of the United States shall be listed at their true value in money and taxed in the city, ward, or town where such bank is located and not elsewhere." This is stated to have been substantially the statute under which this case was decided; the statute quoted, however, is an earlier statute. Even though there may be doubt whether a statute levies the tax on the shares or on the corporation, if the assessment made is actually of the latter character, the value of bonds of the United States must be deducted. In St. Louis Bldg. & Sav. Asso. v. Lightner (1868) 42 Mo. 421, where it was contended that the statute taxed the shares of stock, the court, in summarizing the statute, says that it on contemplated an assessment shares of stock held and owned by individual persons; that these persons were made taxable by law in respect of the shares of stock owned by them in the corporation, but, instead of requiring them personally to give in a list for taxation, the statute made it the duty of the president or other chief officer of the corporation, when called upon by the assessor, to deliver to him a list of all shares of stock held therein, and the names of the The persons who held the same. manifest object of this provision, according to the court, was that the assessor might be thus provided with authentic information as to the persons who owned shares of stock in the corporation, in order that the shares might be properly assessed against them. But in the case at bar there was no attempt to assess shares of stock against the persons owning them. The assessment was made against the corporation, the assessor being of the opinion that the government bonds were subject to taxation either as shares of stock or as part of the capital stock of the corporation, and the court adds that, whatever may be said of requiring the corporation to pay the tax for its shareholders, it was enough for all the purposes of the case at bar that there was no assessment, nor any attempt at an assessment, of taxes in the manner contemplated by the special provision, and therefore the bonds must be deducted. The Nebraska statute involved in State v. First Nat. Bank (1919) 103 Neb. 280, 171 N. W. 912, and Peters Trust Co. v. Douglas County (1921) 106 Neb. 877, 184 N. W. 812 (affirmed in (1923) 260 U. S. 709, 67 L. ed. 475, 43 Sup. Ct. Rep. 250), was held to be a tax on shares. The fact that the statute levies the tax upon the "shares or stock" of the owners thereof does not make the tax one upon capital of the bank as a corporate entity, and not upon the shareholders. Harrison v. Vines (1876) 46 Tex. 15. It seems to be the opinion of some of the courts that the construction of such a statute by the state court is binding upon the Federal court. For example, the Supreme Court says, in First Nat. Bank v. Chehalis County (1896) 166 U. S. 440, 41 L. ed. 1069, 17 Sup. Ct. Rep. 629, that that court is bound by the judgment of the supreme court of the state in the mere matter of the construction of a law levying a tax upon national banks; and the circuit court of appeals, in Hager v. American Nat. Bank (1908) 86 C. C. A. 334, 159 Fed. 396, upon the authority of this decision of the United States Supreme Court, says, with reference to a Kentucky statute, that the act having been construed by the highest court of that state as not imposing a tax upon the corporate capital, but strictly a tax upon shares, this "construction of the act would seem to be conclusive as a decision which we should accept." The circuit court of appeals, however, upon consideration of the Kentucky statute, came to the same conclusion as had been reached by the Kentucky court. In Iowa Loan & T. Co. v. Fairweather (1918; D. C.) 252 Fed. 605, the court states that ordinarily the Federal court would be bound by the construction of such statute by the supreme court of the state, but it is added that the Federal court is not so bound that it may not make inquiry as to whether such statutes, as enforced, effect results contrary to the express language of the statutes of the United States. The question whether the Federal courts are bound by the construction of such statutes by the state courts is beyond the scope of this annotation. W. A. E. (274 U. S. 473, 71 L. ed. 1158, 47 Sup. Ct. Rep. 661.) Notice, 17. - banks, § 102 donee of power. notice of misappropriation of funds by 1. That one having an unlimited power of attorney to draw checks upon his father's bank account deposits them to his own credit in bank does not charge the bank in which they are deposited with notice that he is misappropriating the funds, so as to render it liable to the father for loss due primarily to the application by the son of the bank account to his own use, especially where over two years elapses before the father discovers the misappropriation. [See annotation on this question beginning on page 925.] Banks, § 121 effect of certification of checks. 2. The certification of a check drawn under a power of attorney does not import a statement that, besides the right to draw, the purpose for which the check was drawn was lawful and known to the bank. CERTIORARI to the United States Circuit Court of Appeals for the Second Circuit to review a judgment affirming a judgment of the District Court for the Southern District of New York in plaintiff's favor, in an action brought to recover funds misappropriated under a power of attorney for which defendant was alleged to be responsible. Reversed. See same case below, 9 F. (2d) 713. The facts are stated in the opinion of the court. Messrs. Van Vechten Veeder, William Lee Woodward, and William J. Dean, for plaintiff in certiorari: Defendant did not participate in the diversion of the plaintiff's funds with knowledge or notice of fraud. Central Nat. Bank v. Connecticut Mut. L. Ins. Co. 104 U. S. 54, 26 L. ed. 693; Union Stock Yards Nat. Bank v. Gillespie, 137 U. S. 411, 34 L. ed. 724, 11 Sup. Ct. Rep. 118; Ward v. City Trust Co. 192 N. Y. 61, 84 N. E. 585. Cahan, Jr., had authority to draw the checks in issue. North River Bank v. Aymar, 3 Hill, 262; Hambro v. Burnand [1904] 2 K. B. 10, 5 B. R. C. 480-C. A.; Lloyd v. Grace [1912] A. C. 716, 5 B. R. C. 498, Ann. Cas. 1913B, 819-H. L.; National Safe Deposit, Sav. & T. Co. v. Hibbs, 229 U. S. 391, 57 L. ed. 1241, 33 Sup. Ct. Rep. 818; Warren-Scharf Asphalt Paving Co. v. Commercial Nat. Bank, 38 C. C. A. 108, 97 Fed. 181; Ward v. City Trust Co. 192 N. Y. 70, 84 N. E. 585; London Joint Stock Bank v. Simmons [1892] A. C. 220-H. L. The form and deposit of the checks did not charge the defendant with notice of misappropriation. Whiting v. Hudson Trust Co. 234 N. Y. 394, 25 A.L.R. 1470, 138 N. E. 33; Fidelity & D. Co. v. Queens County Trust Co. 226 N. Y. 225, 123 N. E. 370; Bischoff v. Yorkville Bank, 218 N. Y. 106, L.R.A.1916F, 1059, 112 N. E. 759; Kendall v. Fidelity Trust Co. 230 Mass. 238, 119 N. E. 861; Allen v. Puritan Trust Co. 211 Mass. 423, L.R.A.1915C, 518, 97 N. E. 916; Newburyport v. Spear, 204 Mass. 150, 134 Am. St. Rep. 652, 90 N. E. 522; Batchelder v. Central Nat. Bank, 188 Mass. 25, 73 N. E. 1024; Santa Marina Co. v. Canadian Bank, 165 C. C. A. 611, 254 Fed. 391 (certiorari denied in 250 U. S. 643, 63 L. ed. 1186, 39 Sup. Ct. Rep. 493); Commercial Sav. Bank & T. Co. v. National Surety Co. (C. C. A. 6th) 294 Fed. 261; Goodwin v. American Nat. Bank, 48 Conn. 550; Brookhouse v. Union Pub. Co. 73 N. H. 368, 2 L.R.A. (N.S.) 993, 111 Am. St. Rep. 623, 62 Atl. 219, 6 Ann. Cas. 675; Hood v. Kensington Nat. Bank, 230 Pa. 508, 79 Atl. 714; Duckett v. National Mechanics' Bank, 86 Md. 400, 39 L.R.A. 84, 63 Am. St. Rep. 513, 38 Atl. 983; United States Fidelity & G. Co. v. Home Bank, 77 W. Va. 665, 88 S. E. 109; McCullam v. Third Nat. Bank, 209 Mo. App. 266, 237 S. W. 1051; Gate City Bldg. & L. Asso. v. National Bank, 126 Mo. 82, 27 L.R.A. 401, 47 Am. St. Rep. 633, 28 S. W. 633; J. L. Mott Iron Works v. Metropolitan Bank, 78 Wash. 294, 139 Pac. 36; Rice v. People's Sav. Bank, 140 Wash. 20, 247 Pac. 1009; Southern Trust & Commerce Bank v. San Diego Sav. Bank, 60 Cal. App. 215, 212 Pac. 385; United States Fidelity & G. Co. v. First Nat. Bank, 18 Cal. App. 437, 123 Pac. 352; State ex rel. Davis v. Farmers & M. Bank, 112 Neb. 840, 201 N. W. 897; Interstate Nat. Bank v. Claxton, 97 Tex. 569, 65 L.R.A. 820, 104 Am. St. Rep. 885, 80 S. W. 604; Corporation Agencies v. Home Bank [1927] A. C. 318-P. C.; Gray v. Johnston, L. R. 3 H. L. 1; Coleman v. Bucks & 0. Union Bank [1897] 2 Ch. 243; Shields v. Bank of Ireland [1901] 1 Ir. R. 222; Eastchester v. Mt. Vernon Trust Co. 173 App. Div. 482, 159 N. Y. Supp. 289; Newburyport v. First Nat. Bank, 216 Mass. 304, 103 N. E. 782; Safe Deposit & T. Co. v. Diamond Nat. Bank, 194 Pa. 334, 44 Atl. 1064; Munnerlyn v. Augusta Sav. Bank, 88 Ga. 333, 30 Am. St. Rep. 159, 14 S. E. 554; Martin v. Kansas Nat. Bank, 66 Kan. 655, 72 Pac. 218; Charleston Paint Co. v. Exchange Bkg. & T. Co. 129 S. C. 290, 123 S. E. 830; National Safe Deposit, Sav. & T. Co. v. Hibbs, 229 U. S. 391, 397, 57 L. ed. 1241, 1247, 33 Sup. Ct. Rep. 818; Merchants Nat. Bank v. State Nat. Bank, 10 Wall. 604, 648, 19 L. ed. 1008, 1019. The court below applied an erroneous criterion of notice. Cheever v. Pittsburgh, S. & L. E. R. Co. 150 N. Y. 65, 34 L.R.A. 69, 55 Am. St. Rep. 646, 44 N. E. 701; Murray v. Lardner, 2 Wall. 110, 121, 17 L. ed. 857, 859; Hotchkiss v. National Shoe & Leather Bank, 21 Wall. 354, 359, 22 L. ed. 645, 649. Messrs. Charles E. Hughes, Jr., Augustus L. Richards, Bertram F. Willcox, and Harold L. Smith, for defendant in certiorari: The deposit by a fiduciary in his individual bank account of checks which show on their face that they represent fiduciary funds is sufficient evidence of misappropriation to impose upon the bank a duty of inquiry. Farmers' Loan & T. Co. v. Fidelity Trust Co. 30 C. C. A. 247, 56 U. S. App. 729, 86 Fed. 541; Havana C. R. Co. v. Central Trust Co. L.R.A.1915B, 715, 123 C. C. A. 72, 204 Fed. 546; Oklahoma State Bank v. Galion Iron Works & Mfg. Co. (C. C. A. 8th) 4 F. (2d) 337; Wagner Trading Co. v. Battery (274 U. 8. 473, 71 L. ed. 1158, 47 Sup. Ct. Rep. 661.) Park Nat. Bank, 228 N. Y. 37, 9 A.L.R. 340, 126 N. E. 347; Porges v. United States Mortg. & T. Co. 203 N. Y. 181, 96 N. E. 424; Sims v. United States Trust Co. 103 N. Y. 472, 9 N. E. 605; Niagara Woolen Co. v. Pacific Bank, 141 App. Div. 265, 126 N. Y. Supp. 890; Spaulding v. Kelly, 43 Hun, 301; Taylor v. Harris, 164 Ky. 669, 176 S. W. 168; Mitchell v. First Nat. Bank, 203 Ky. 770, 263 S. W. 15; Duckett v. National Mechanics' Bank, 86 Md. 400, 39 L.R.A. 84, 63 Am. St. Rep. 513, 38 Atl. 983; Duckett v. National Bank, 88 Md. 8, 41 Atl. 161, 1062; United States Fidelity & G. Co. v. People's Bank, 127 Tenn. 720, 157 S. W. 414; Bank of Hickory v. McPherson, 102 Miss. 852, 59 So. 934; United States Fidelity & G. Co. v. Adoue, 104 Tex. 392, 37 L.R.A. (N.S.) 409, 137 S. W. 648, 138 S. W. 383, Ann. Cas. 1914B, 667; A. L. Underwood v. Bank of Liverpool [1924] 1 K. B. 775-C. A.; Ex parte Darlington Dist. Joint Stock Bkg. Co. 4 De G. J. & S. 581, 46 Eng. Reprint, 1044; Ross v. London County W. & P. Bank [1919] 1 K. B. 686; Toronto Club v. Imperial Trusts Co. 25 Ont. L. Rep. 343; Havana C. R. Co. v. Knickerbocker Trust Co. 135 App. Div. 316, 119 N. Y. Supp. 1035; United States v. National Exch. Bank, 270 U. S. 527, 70 L. ed. 717, 46 Sup. Ct. Rep. 388; Colonial Bank v. Cady, L. R. 15 App. Čas. 267 — H. L.; Hale v. Windsor Sav. Bank, 90 Vt. 487, 98 Atl. 993; Brovan v. Kyle, 166 Wis. 347, 165 N. W. 382; American Bonding Co. v. Fourth Nat. Bank, 205 Ala. 652, 88 So. 838, 206 Ala. 640, 91 So. 480; Central Nat. Bank v. Connecticut Mut. L. Ins. Co. 104 U. S. 54, 68, 26 L. ed. 693, 699. The weight of authority with respect to agents is that they are not entitled to deposit their principals' funds to individual credit, and that a bank which permits such a deposit is liable for a resulting misappropriation. Wagner Trading Co. v. Battery Park Nat. Bank, 228 N. Y. 37, 9 A.L.R. 340, 126 N. E. 347; Porges v. United States Mortg. & T. Co. 203 N. Y. 181, 96 N. E. 424; Sims v. United States Trust Co. 103 N. Y. 472, 9 N. E. 605; Gerard v. McCormick, 130 N. Y. 261, 14 L.R.A. 234, 29 N. E. 115; Rochester & C. Turnp. Road Co. v. Paviour, 164 N. Y. 281, 52 L.R.A. 790, 58 N. E. 114; Spaulding v. Kelly, 43 Hun, 301; Niagara Woolen Co. v. Pacific Bank, 141 App. Div. 265, 126 N. Y. Supp. 890. or Certification acceptance by drawee banks has no effect on defendant's duty of inquiry. Whiting v. Hudson Trust Co. 234 N. Y. 394, 25 A.L.R. 1470, 138 N. E. 33; First Nat. Bank v. Leach, 52 N. Y. 350, 353, 11 Am. Rep. 708; First Nat. Bank v. Whitman, 94 U. S. 343, 345, 24 L. ed. 229, 231. Mr. Justice Holmes delivered the opinion of the court: This is a suit brought by the respondents to charge the petitioner with liability for the proceeds of checks drawn upon the agents of the Bank of Montreal or the Guaranty Trust Company, in New York, and deposited with the petitioner by the respondent's son. The respondent, a Canadian lawyer, had accounts with the two banks named and in 1916 gave to his son powers of attorney to draw checks upon them, both powers being general and with no qualification as to the purposes for which such checks might be drawn. Beginning in July of that year and from time to time down to October, 1918, the son drew checks signed with his father's name by himself as attorney against his father's two accounts, payable seventeen to his own order, three to the order of the petitioner, and deposited them to his own private account with the petitioner. All the checks but two were certified by the Guaranty Trust Company or accepted by the other bank as the case might be. Subsequently the son drew out these funds and applied them to his own use. The respondent did not discover the fraud until the end of 1919, at which time his son absconded. The petitioner had no knowledge that the son was misappropriating his father's money and no notice other than what was given by the form of the checks. The district court and the circuit court of appeals for the second circuit held that notice sufficient to charge the petitioner as matter of law and gave judgment against it, the circuit court of appeals adding interest on the several items from the date when they were credited |