## Facts

- Charles A. Munroe lent corporate stock to Joseph W. Harriman, president of a national bank, for Harriman’s personal use as collateral for personal borrowing; the loan was procured by Harriman’s fraud.
- Munroe dealt with Harriman in his personal capacity; Harriman was not acting as the bank’s agent when he borrowed the securities from Munroe.
- Harriman controlled “dummy” corporations and caused the bank to make a $380,000 time loan to one such entity, pledging Munroe’s stock (and other stock) as collateral; an additional $14,000 was later advanced on the same collateral.
- Loan proceeds were used largely to pay or replace obligations connected to the bank, including paying part of Harriman’s personal debt to the bank.
- The bank’s loan committee formally approved the loan, but trial findings were that Harriman dominated bank officers and the committee routinely followed his directions.
- Except for Harriman, participating bank personnel did not know the pledged securities had been obtained from Munroe by fraud.
- Munroe became suspicious in July 1932 after the value of collateral Harriman had given him declined; on July 28, Munroe’s attorney warned the bank the securities belonged to Munroe and threatened legal action if further advances or rehypothecation occurred.
- Munroe and counsel learned of the fraud on September 14, 1932; on September 16 they demanded return of the securities from Harriman and the bank.
- Munroe sued in equity to rescind and recover the securities; during litigation the bank entered liquidation and a receiver was substituted as defendant.

## Issues

1. Whether the bank was charged with Harriman’s knowledge of his fraud when the bank took Munroe’s securities as collateral for a loan arranged and controlled by Harriman.
2. Whether Munroe could rescind the fraudulent lending transaction and reclaim the securities from the bank/receiver as a pledgee claiming to have taken for value without notice.
3. Whether Munroe’s delay in discovering and asserting the fraud, and his communications with the bank, barred rescission by waiver, laches, or ratification.

## Decision

- The Second Circuit affirmed the decree granting Munroe rescission and recovery of the securities from the bank and its receiver.
- Harriman’s knowledge of the fraud was imputed to the bank in connection with the bank’s acceptance of the securities as loan collateral.
- Because the bank was treated as having notice through imputation, it could not claim bona fide pledgee protection against Munroe’s equitable ownership claim.
- Munroe acted promptly enough after discovery of the fraud; the timing and notice to the bank did not bar rescission.

## Legal Principles

- A principal is generally charged with an agent’s knowledge obtained in connection with the agent’s conduct of the principal’s business.
- The “adverse interest” limitation on imputation does not prevent charging the principal with the agent’s knowledge where the agent so dominates the principal’s affairs that the challenged transaction is effectively the principal’s act, and the transaction is intertwined with the principal’s business and benefits the principal.
- A pledgee asserting rights in collateral is not protected as a good-faith pledgee without notice when notice is imputed through the knowledge of the officer who caused the pledge and controlled the transaction.
- Rescission for fraud must be exercised within a reasonable time after discovery; suspicion alone does not necessarily start the period, and timely notice and demand after learning the fraud can preserve rescission where the opposing party has not changed position in good faith reliance on ignorance.

## Conclusion

The court held that although Munroe originally lent the stock to Harriman personally, the bank was charged with Harriman’s knowledge when it accepted the stock as collateral in a loan he controlled and that benefited the bank; as a result, the bank and its receiver took the collateral subject to Munroe’s rescission rights, and Munroe’s notice and demand were timely enough to recover the securities.


Munroe v. Harriman, 85 F.2d 493 (2d Cir. 1936)