Decisions Relating To National Banks
( Originally Published 1918 )
The following Federal decisions were reported in volumes 241 to 244, United States Reports, and volumes 235 to 243, Federal Reporter.
Agent of Shareholders
(Bills and Notes-Right of Action—Representative Capacity)
Plaintiff may sue, in his representative capacity as agent for the shareholders of a bank, on a note payable to plaintiff, "agent for the shareholders" of that bank, though those words would be construed as merely descriptio personae in a suit by plaintiff as an individual.
The court can at the trial of a suit by plaintiff, as agent for shareholders, on a note payable to him as such agent, permit plaintiff to amend the complaint, so as to allege delivery to, presentation, notice, and demand by, indebtedness to, and prayer for, judgment in favor of plaintiff in his representative capacity, instead of as an individual; those amendments, if necessary, being merely matters of form, which could not have surprised defendant.
(Rights and Liabilities of Holders of Collateral)
A person placing his signature upon a note, otherwise than as maker, drawer, or acceptor, is deemed an indorser, unless he clearly indicates by appropriate words his intentions to be bound in some other capacity; an indorser before delivery is liable only as indorser, not as joint maker; and the payee of a note given by one corporation and indorsed by an individual and another corporation, without anything to show that the indorsers were bound in any other capacity, cannot retain collateral pledged to secure that note, with the right to retain it to secure any other obligation, to secure notes given by the other corporation, even if it could do so in case the two corporations were joint makers.
Corporations— Powers— Lending Credit—A corporation organized to buy, gin, manufacture and sell cotton, cotton seed, and its products, and empowered to borrow money and issue notes or bonds on the faith of the corporate property, but whose powers were limited by a provision that by no implication of construction should it be deemed to possess any powers except those expressly given or necessarily implied from the nature of the business for which the charter is granted, has no implied power to lend its credit to another corporation.
Loans Personal Liability.— Where money loaned by a bank to one corporation was used for another corporation, both corporations being controlled by the same stockholder, such use did not make the latter corporation a debtor to the bank, since, when the money was loaned, it be-came the absolute property of the first corporation, and the rule of equity allowing money to be followed applies only where the money has the character of a trust fund.
Collateral Security — Knowledge of Title. Where the controlling stockholder of two corporations authorized a bank to retain the bonds of one as security for the debts of the other, the bank cannot claim the bonds against the creditors of the latter after bankruptcy as a bona fide purchaser from the stockholder, notwithstanding his claim that he owned the bonds, where the bank had full knowledge of the entire transaction, and knew that such claim of ownership was based on a supposition that the controlling stockholder owned both corporations, since it could not take advantage of that clear mistake of law.
Bona Fide Purchaser. The acceptance of a new note for the antecedent debt of a corporation is not consideration for the pledge of bonds of another corporation, which had no authority to lend its credit, by the controlling stockholder of both corporations, since it did not move to the corporation issuing the bonds, and. the bank cannot claim to be a purchaser of those bonds for value.
Rights of Trustee Fraud. A trustee can, for the benefit of the creditors of a bankrupt corporation, have cancelled the bonds of the corporation, and a trust deed securing them, held by one to whom they had been pledged for a debt of an-other corporation, for which they could not be held, though there was no fraud alleged, and the bank in good faith believed that it was entitled to hold them.
Discount Nature of Transaction. A transaction whereby a bank indorsed to another without recourse a number of notes under an agreement that the indorsee would credit the indorser with the amount of the notes and interest less the agreed discount, and that whenever any of. the notes fell due the account was to be charged with the amount and the note sent to the indorser for collection, was a "loan" with collateral security, not a sale of the notes.
Pledge—Statute—"Disposing."—Prohibiting a bank association, in selling or disposing of loans made on real estate security, from guaranteeing the payment or collections thereof, and providing that contract guaranteeing such payment shall not be binding on the bank, does not apply to a pledge of a note secured by real estate mortgage to secure a loan to the bank, since "disposing," as used in the statute, means to part with, to alienate.
Authority of Cashier—Estoppel.--Where a bank had without question received and applied to its own use money loaned by another bank on security of notes indorsed by its cashier, it can not question the cashier's authority to agree that the amount of those notes when due should be charged against it.
Transfer of Assets. Where the stockholders of a state bank organized a national bank which took over the assets of the state bank for a consideration of one dollar and its agreement to pay the deposits, time certificates, cashier's checks, and certain bills payable at the state bank, and the state bank returned to its principal stockholders the amount of the assessment levied against all the shares a few years before which had all been paid by the principal stockholder, and the sum so returned was used by him to repay the loan of the money necessary to organize the national bank and to purchase additional stock in the national bank, the transfer of the assets rendered the national bank liable for the amount of a loan made to the state bank secured by a note pledged as collateral.
Warehousemen--Uniform Warehouse Act
In proceedings relative to the bankruptcy of a firm of cotton factors by virtue of the Bankruptcy Act as amended, the trustee represented unsecured creditors with exactly the same force and effect as if they had, on the date of the filing of a petition in bankruptcy, levied executions upon the cotton stores by the firm in a warehouse.
The Uniform Warehousing Act. The Uniform Warehousing Act of Tennessee, intended to cover the subject of the respective rights of holders of warehouse receipts and creditors of the depositors, has superseded all existing common or statutory law on the subject.
Pledges Delivery. It is a general rule that a pledge, not followed by delivery, actual or symbolical, is invalid against execution levying creditors of the pledgor.
Factors Strict Construction. The Uniform Warehousing Act of Tennessee, giving factors the right effectively to pledge the consignor's interest, which did not formerly belong to them, will be strictly construed.
Warehousemen Strict Construction. — The Uniform Warehousing Act of Tennessee, recognizing the power of the depositor of goods in warehouse to pledge warehouse receipt so as to give a better title than he had and to disregard those rights which under the state's policy would otherwise accrue to the execution creditor, will be strictly construed.
Warehousemen Warehouse Receipt Statute. (U. S. C. C. A., 1916.) Under Uniform Warehousing Act Tennessee (Acts 1909, c. 336), sec. 2, prescribing what every warehouse receipt must embody, receipts reading "Received in warehouse for the account of Lesser-Ely Company two hundred bales of cotton. Same to be held subject to the order of the Lesser-Ely Cotton Co. D. W. McLemore & Co., Warehousemen. No. Bales, 200" was insufficient to come within the protection of the act as failing to describe the cotton for purposes of identification as required by clause F of section 2. (lb.)
Negotiable Receipt. The Uniform Warehousing Act of Tennessee, providing that a receipt stating that the goods will be delivered to the bearer or to the order of any person named in such receipt, is a negotiable receipt, and that no provision shall be inserted in the negotiable receipt that it is nonnegotiable, such provisions if inserted being void, does not convert into a valid statutory negotiable receipt a paper which fails to contain all the requisites of a statutory receipt.
"Fungible Goods" are those of which each unit is fully equivalent to each other unit, an equivalency which may be inherent or may result from an agreement which may be express or implied from custom.
If authorized by agreement or custom, a ware-houseman may mingle fungible goods with other goods of the same kind and grade, etc., where cotton warehousemen in the city had long been in the habit of issuing receipts which banks of the city and adjacent cotton country had been in the habit of treating as good for loans of $50 per bale, all of the bales of cotton in a warehouse of varying values did not become pro tanto fungible goods, so that holders of the warehouse receipts became tenants in common of the entire mass.
Right of Consignors. Where the consignors of cotton to a firm of factors did not participate in an arrangement whereby the firm stored the cot-ton in a warehouse, taking blanket warehouse receipts which it pledged for loans in accordance with a custom of the vicinity, the consignors (having no knowledge of the custom permitting such blanket receipts) were not bound by estoppel by the pledges for the factors' debts accompanied by neither actual nor symbolical delivery, since estoppel cannot bind those not parties to an arrangement and who never did anything on the faith of which another has acted.
Rights of Creditors of Factors. General creditors of a firm of cotton factors, not parties to the arrangement and without knowledge thereof, which stored cotton in a warehouse, taking blanket receipts and pledging them to secure loans by banks, were not estopped by the pledge of the receipts.
Superiority of Lien Tennessee Law. It is the policy of Tennessee law that an execution creditor gets a lien superior to other prior liens which may be perfectly good as between lienor and lienee, but which have not been preserved against execution creditors in some manner provided by law.
Warehouse Receipts Validity. The rule that warehouse receipts are valid and enforceable both at their inception and thereafter, because in-tended to cover property which could always be identified, cannot extend to a case where no separate receipt covers all the property, but where the result is reached only by the aggregate of many independent receipts.
Authority of Banks. Where a bank received notes for collection only, it was without authority to extend the maturity of the notes or sell them, in the absence of express authority.
Sales of Notes. Notes secured by a mortgage were deposited with a bank for collection only. The bank disposed of the notes to third persons, and they came into the possession of the maker, who pledged them with the bank. Thereafter the maker became bankrupt, and on bankruptcy sale the bank bought in the property mortgaged to secure the notes, tendering such notes in payment. Held, that as it was to the disadvantage of the holder of the notes, who deposited them with the bank, for such notes to be negotiated, instead of paid, he holding other notes, as the value of the security would have been increased by such payment, the bank could not use such notes in defraying the purchase price, without proving its authority to sell the notes.
Right of Bank. A bank credited to the account of its depositor a check drawn on another bank and permitted the depositor to draw out the full amount thereof. The check was dishonored by the drawee bank for want of funds and re-turned to the first bank, which charged the amount against its depositor's account. At that time the account, according to the books of the bank, was sufficient to meet the check but it in fact consisted only of credits given for the de-posit of other checks, which thereafter proved not to be good. Held, that the bank was not merely a holder for collection but a holder for value, so that it could sue thereon under Revisal N. C. 1915, § 2206, free from defenses available to prior parties.
Deposits for Collection. A corporation having a deposit in a bank which held its overdue notes for an amount exceeding the deposit, indorsed checks payable to it, and mailed them to the bank with intent that they should be collected and credited to its account. Subsequently a receiver for the corporation was appointed, and still later the bank with knowledge of the receivership received the checks, credited them to the corporation, subject to the right to charge them back if not paid, collected them and credited the amount on the notes. Held, that as against the receivers the bank was entitled to the amount collected; the corporation having lost control of the checks before the receivership.
Rights of Bank. The regulations of the Post Office Department, whereby under certain circurnstances the department in its discretion may return a mailed communication to the sender, did not affect the rights of the bank; the sender having intended that the mailed matter should go for-ward without interruption, and not having sought to recall it, but having disabled itself from recalling it.
That the corporation had never before deposited checks payable to it in such bank, but had made its deposits in the form of its own checks on another bank, did not affect the rights of the bank, nor did the fact that it took the bank some days to collect the checks.
Notes Payable at Bank. The notes by their terms were made payable at the payee bank; this did not make such bank the collecting agent of a bank to which they were indorsed and transferred before maturity.
Payee as Agent of Holder. On the issue of whether a payee bank at which notes secured by a chattel mortgage were payable was the agent of a bank to which it transferred the notes, without the maker's knowledge, with authority to receive payment, evidence held not to warrant a directed verdict for the maker, though raising a strong presumption that he had a right to believe that it was such agent.
Conditional or Absolute Deposit.--A depositor and his bank may agree that checks or drafts on other banks, which he deposits, shall immediately become the property of the bank, or that the bank shall hold them and continue the credit to him only on condition that they are paid in the regular course of business.
Absolute Deposit. A customer, who deposits checks or drafts on other banks with his bank, which gives him credit in his general account subject to check, thereby transfers the title to the checks or drafts, and renders the bank his debtor to the amount thereof, in the absence of an agreement to the contrary.
Evidence. Where four checks on other banks were accepted by the depositor bank and placed to the credit of the depositor, subject to its check, without any special agreement, and the depositor bank honored checks on the account to an amount exceeding the account, aside from the checks deposited in payment of notes held by the bank for collection, which notes it cancelled and delivered to the depositor, the checks deposited became the absolute property of the bank, notwithstanding the testimony of the bank officers that they intended to give to a credit for them conditioned on payment in due course.
Honorary Checks Estoppel. A bank which honors or pays a check of a depositor in the mistaken belief that his credit is larger than it in fact is, or in the hope or mistaken belief that checks which it has credited to his account will be paid, is estopped as against the owner of the check from revoking or avoiding such payment, since the bank may know the state of its own accounts, which the owner of the check cannot know, and since any other rule would result in intolerable delay, uncertainty, and confusion in commercial transactions.
Payment of Notes. Where a bank to whom notes of a depositor have been sent for collection, accepts the depositor's check in payment thereof, cancels the notes, and surrenders them to the depositor, and draws and mails its draft for the proceeds of the notes, less its commission, there is an absolute payment of the notes, which, as against the payee, the bank has no power to revoke so as to be relieved of liability for payment of its draft.
Agency for Collection. When a bank at which notes are payable accepts an agency from the owner to collect them it is bound to preserve for him every right he would have had if another party had accepted and performed with reasonable diligence the duty of such agent, and cannot defeat an action on its draft, which could not be defeated by another agent who had made the collection under similar circumstance.
Negligence in Making Collections. In an action by a bank to whom a draft was payable against its correspondent bank to whom it indorsed the draft for collection to recover damages for the latter's negligence in notifying the payee bank that the draft had been accepted by the drawee, when in fact acceptance had been refused, and in failing to protest the draft and to notify the payee bank for ten days thereafter, during which time a cargo of lumber which the payee might have attached was shipped by the drawer, evidence that the drawer was insolvent at the time and largely indebted to the drawee, and that if the lumber had been attached the drawee could have filed a petition in bankruptcy against the drawer, is not admissible to show that the payee bank lost nothing because of its correspondent's negligence, since it cannot be assumed that the drawer, though insolvent, could not have secured the money to meet the draft in some way.
Breach of Duty. In an action against a bank for damages caused by its breach of duty as agent to collect a check drawn upon it which there were sufficient funds to meet, prima facie proof that the check reached the town in which the bank was located on Friday evening justifies an inference that it came into the hands of the bank next morning so as to be entitled to payment in preference to other checks presented and paid on Monday and which the bank claimed were presented before the check in controversy, and it was error to direct a verdict for defendants at the close of plaintiff's evidence.
Acceptance for Collection. Where a bank to which a check drawn against it had been sent dishonored the check and had it protested, there was sufficient evidence that it had accepted the check for collection, and the bank cannot deny that it had thereby made itself the holder's agent.
Failure to Pay Check. In an action against a bank for its breach of duty as an agent to collect a check drawn upon it, where the bank answered that it had first paid other checks which exhausted the account, the circumstances attending the payment might raise a question for the jury as to whether the bank had discharged its duty toward the holder of the check in suit, even if the other checks were presented at the same time or even before the checks in the suit, so that it was error to direct a verdict for defendants at the close of plaintiff's evidence.
Limitation of Actions. An action against a bank for breach of its duty to collect a check and against another bank which took over the assets of the former is barred as against the latter bank by the North Carolina three year statute of limitations, when not commenced until five years after the transaction and four years after the transfer of the assets.
Surrender of Collateral. Where a bank holding a draft for collection, with instructions to deliver documents attached only on payment, permitted drawee to take possession of goods covered by the documents on his agreeing to deposit the proceeds thereof as sold, such action on the part of the collecting bank constituted a payment in law of the draft if the value of the goods was not less than the amount of the draft.
Such action of the collecting bank amounted to a misappropriation of the property and liability to account for its value immediately arose.
The collecting bank became invested with ownership of the goods and could not be excused from obligation to account by declaring that goods had disappeared without its knowledge ; the relation of principal and agent existed and, as agent, the collecting bank was obligated to act in good faith to protect rights of owner of draft. Even if the bank sending draft for collection suffers no loss on account of guaranty from original owner, it may in view of its relation to commercial paper, demand, as principal, an accounting from its correspondent, and resist an action to recover back money received upon the draft.
Deposits are not the property of the depositors, but of the bank receiving them; the relation of a bank and its depositors being that of a debtor and creditor, so that deposits and investments are equally assets of the bank.
Deposit of Checks. Where checks indorsed in blank are deposited with a bank, and an immediate credit is entered in the passbook to the depositor, the checks at once become the property of the bank, but the bank's right to the checks depends upon the depositor's immediate and unconditional right, not merely as a favor, to draw upon the deposit, and, if the depositor did not have such right until collection, the bank did not become the owner; hence a bank does not become the owner of checks deposited with it, where the passbook expressly declared that deposits of checks should not be drawn against until collected.
Effect. Where the passbook of a depositor declared that deposits of checks should not be drawn upon until collection, the bank does not become the owner of checks deposited with it, unless such rule is expressly waived and the depositor given the right to draw at once, though the depositor may be allowed to draw on such deposits as a matter of grace.
Rights of Depositor. Where private bankers, at the time they received deposits of checks, knew of their insolvency, and such checks were not collected until after possession of their assets was taken by the bank examiner, the receiver, appointed by the bankruptcy court, cannot, the checks having been subsequently collected, retain the proceeds as against the depositors.
Application of Deposit on Claim. The right of a banker to charge up to a depositor without his order the amount of his note, or other obligation to pay, before it is due, is conditioned on the Tatter's insolvency.
Insolvency and Receivers
Powers of Receiver. Defendant, as receiver of a national bank, contracted on its behalf, with the approval of the Comptroller of the Currency, for the purchase of certain realty, used some of the bank's money in payment on the price, and, under apparent authority from the court, sold and as-signed the contract for cash paid the bank. The assignee acted secretly for the defendant in taking the contract, and thereafter assigned it secretly to him as an individual. Defendant re-signed as receiver, and subsequently the contract was fully performed and the real property became vested in a corporation whose shares for the most part were issued to the defendant. In a suit brought by his successor to regain the property for the bank, Held: (1) That the transaction was a gross breach of defendant's duty as receiver; (2) that he was estopped to claim that the purchase of the property was beyond the powers of the bank; (3) that delay of the suit for sixteen years after the making of the contract and four-teen years after defendant's resignation as receiver was not laches, in view of the finding that his successors in the receivership had no knowledge or equivalent notice of the fraud. The seven-year statute of limitations of Washington does not apply when the claim of title accompanying possession is not made in good faith.
Actions by Receivers. Where, to enable bank officials to conceal the true financial condition of the bank, defendant without consideration executed his note payable to the bank to be held by it in lieu of worthless notes, it being agreed that defendant's note might be discharged by a return of the worthless notes then delivered to defend-ant, the whole transaction is fraudulent, and the note therefore becomes unenforceable in the hands of the bank.
Rights of Receivers. A receiver of the assets of an insolvent bank has no greater right in obligations payable to the bank than the bank itself.
Illegal Transaction. A note, executed by defendant for accommodation and without consideration to enable bank officials to conceal their defalcations from depositors and governmental inspectors, is tainted with fraud; so, the rights of no innocent purchaser for value having intervened, it cannot be enforced by the bank or its receiver, though the transaction was such that defendant must have known that the purpose of the note was to conceal the bank's financial condition.
Legality of Consideration. A note, executed without consideration pursuant to a scheme of the president of a bank to enable him to conceal his defalcations and the bank's true condition, being tainted with illegality, cannot be enforced by the bank.
Recovery of Trust Funds. Complainant de-posited for collection with the bank for which defendant became receiver certain school district warrants. The bank collected the same in three installments, in each case depositing the checks received to its credit in a different correspondent bank. Between the time of such deposits and its failure, some months afterwards, it overdrew its accounts with two of such correspondents for purposes not shown. In the third correspondent bank it maintained a deposit at all times until its failure, the amount at that time being the smallest, and less than the collection deposited. Held, that the collections constituted a trust fund, recoverable by complainant from the receiver, in so far as it could be traced into his hands, and that in the case of the third bank complainant was entitled to recover the amount remaining in the account at the time of the failure, but that in the case of the other two deposits nothing was recoverable, although the bank at the time of closing and at all times prior thereto had cash on hand greater in. amount than the collections; there being no presumption that the collections ever went into such cash fund.
Deposit of Municipal Funds. Pierce's Code, Washington, 1912, title 77, sections 681, 683, requires municipalities to designate one or more banks in the county where the city is located as a depositary or depositaries of funds required to be kept by the city treasurer, but provide that, before any such designation shall entitle the treasurer to make deposits in such bank, the bank so designated shall file with the comptroller or town clerk a surety bond in the maximum amount of the deposits, or shall deposit bonds with which to secure the same. A city having negotiated a sale of bonds to raise funds to be expended upon its water system, the treasurer delivered the bonds to the bank designated as the city depositary, and which had given a bond in the amount of $10,000, with instructions to forward and collect the draft. The bank, though the proceeds from the bonds greatly exceeded $10,000, permitted the same to be placed to its credit by its correspondent, giving the treasurer credit on its books for the amount. Held, that as the bank knew of the purpose for which the bonds were to be sold, and was not an authorized depositary, it was guilty of a violation of the law, rendering it liable as a trustee for such funds.
Insolvency Trust Funds Liability. Where a bank,, having become liable as a trustee for moneys wrongfully commingled with its own funds, became insolvent and a receiver was appointed, the trust may be impressed upon funds so misappropriated to the extent that they can be traced, either in their original or substituted form, into funds which came into the possession of the receiver; the cestui to that extent being entitled to a preference over other creditors.
Trust Funds Evidence. In a suit against the receiver of an insolvent bank, which, without authority of law, permitted the proceeds of a draft for the purchase price of municipal bonds deposited for forwarding, the collection to be credited to its account by its correspondent, evidence held insufficient to show that any such proceeds, either in the original or substituted form were represented by funds which came into possession of the receiver, and hence no trust could be imposed upon such funds.
Trust Funds Receivers. A bank, authorized only to collect a draft for the purchase price of city bonds, allowed its correspondent to deposit the funds to its credit, though such deposit was in violation of law; the bank not having given bond to secure a deposit for the saine. The correspondent applied a portion of such proceeds on the bank's overdraft. Held, that there being no showing that any of such proceeds came into the hands of the receiver, such application by the correspondent furnishes no basis for giving the municipality priority in funds received by the receiver on the theory of a trust, for it must be assumed that the correspondent dealt with the proceeds of the bonds on the understanding that the bank had complied with the law.
Liquidation by a national bank does not terminate the existence of the bank as a legal entity which can sue and be sued, and therefore an action against it is not barred within three years after liquidation.
Pledges Parol Evidence: Where the property and securities of a defendant bank were transferred to another bank under a written instrument providing that the transferee should discharge all debts and liabilities, is admissible to show that the instrument was not a sale but a pledge; equity looking to the substance and not the form.
Sales Construction. By written agreement, defendant bank transferred its assets to another bank, which agreed to discharge the debts and liabilities of defendant bank. Individuals named as parties of the second part, who signed the contract, guaranteed at the end of three years, should the assets be insufficient to discharge all debts and liabilities, indemnify the transferee ; it being further agreed that, should the guarantors pay any such deficiency, the transferee would deliver to them all assets not reduced to cash. About a year later, the defendant bank executed a note for a large sum and delivered it to the transferee bank as evidence of the indebtedness then existing and subsequently, the indebtedness having been reduced, a note for a lesser amount was given. Held, that the contract was not one of sale, but was a conveyance to enable the transferee to pass title to assets of the defendant bank and dispose of them for the payment of debts, and therefore, defendant bank being bound to reimburse its transferee, one who subsequently purchased the stock of defendant bank cannot complain of the execution of the notes.
Rights of Stockholders. Where defendant bank, which was in difficulties, transferred its as-sets to another institution, which agreed to pay its debts and liabilities, one who subsequently purchased stock of the defendant bank could not, the debts having exceeded the assets, reclaim assets remaining before he had paid the amount of indebtedness for which defendant was liable to its transferee.
Evidence that negotiation of attorneys for sale to plaintiff of a note would naturally have informed it that they were acting for H., and the fact that the form of indorsement thereon by defendant bank, after that of H., was, "Pay to the order of any bank or banker. All previous indorsements guaranteed" authorizes a finding that plaintiff was not a holder in due course, on the theory that it was put on inquiry, which would have disclosed that defendant bank was only a forwarding agent.
Accommodation Indorsement. That defendant was an accommodation indorser of the note sued on may be shown by transactions occurring out of plaintiff's presence; it being shown to be chargeable with notice.
Nature of Bill Completion. A bill made in the form of a check, even if valid, is incomplete, and not commercial paper at all, until it has been indorsed and delivered to some person other than the drawer.
Forged Bills: An army officer detailed to the Quartermaster's Department, and authorized to draw upon funds placed by the Treasury Department of the United States at his disposal, was assisted by a sergeant. While the officer was temporarily absent upon leave, the sergeant took one of the regulation drafts of the Treasury Department, filled it in the order of the officer and forged the latter's name as drawer. Having forged the indorsement of the officer's name in blank, he cashed the check over the counter of a bank, which indorsed the check to defendant, which received payment from the Treasury Department. The forgery being discovered, suit was instituted against defendant to obtain a re-fund of the amount so paid. Held, that as the check was ineffective as commercial paper until indorsement of the name of the drawee, who was also the drawer, and as any holder may fill a genuine bill with the names of others and forge their indorsements, without affecting his rights or the drawee's obligation, the United States cannot recover from defendant the amount paid on the bill.
Representation by Officers. That the president of a bank, in exchanging notes with another bank, had no authority to agree to reexchange on demand, did not defeat the right of the other bank to recover its note or the proceeds, since if the bank adopted the act of for it, it had no right to the note or its proceeds.
Effect of Acts Ultra Vires. That the contract was ultra vires did not defeat the right to recover the note or its proceeds, since, while the courts will not sustain an action on the unlawful contract, they strive to do justice so far as can be done by permitting property or money parted with on the faith of the unlawful contract to be recovered back or compensation to be made for Transfer— Consideration. — Where the note transferred to one of the banks was never the property of the other, and moreover was worth-less, there was no consideration passing to the first bank for its note, and it was entitled to the return of the note or its proceeds.
Powers of Cashier Issuance of Drafts. The Missouri negotiable instruments law provides that an acceptance must be in writing and signed by the drawee, that the drawee is allowed 24 hours after presentation in which to decide whether or not he will accept the bill, but that where he "destroys the same, or refuses within 24 hours after delivery, or within such other period as the holder may allow, to return the bill accepted or nonaccepted to the holder, he will be deemed to have accepted the same." The president and manager of a mercantile corporation, who was also cashier of the bank in which it was a depositor, made a time draft on the bank in its behalf in favor of a holder of the corporation's note, requesting that it be sent, accepted and re-turned at once. A few days later the payee again wrote, asking to be informed by return mail whether the draft would be returned. It was not returned, but the bank, by the cashier, sent its own draft on a correspondent bank for the amount, which was received by the payee, and the note, which was signed by solvent sureties, was surrendered. Some two and one-half years afterwards a receiver for the bank brought suit to recover the money paid on its draft. Held, that the action of the bank amounted to an acceptance, which made it the principal debtor on the draft, and that it was bound by the payment.
Directors May Authorize Cashier. The board of directors of a national bank have power under the national bank act to clothe the cashier with authority to sell corporate shares which have been acquired by the bank as the result of a loan made upon the shares as security. Whether the rules adopted by the boards of directors of a national bank to govern its business do or do not empower the cashier to sell corporate shares which the bank has acquired as the result of loans upon them as collateral is a question involving the interpretation of the rules as applied to the circumstances of the transaction, and not a question concerning the meaning of the national bank act upon which this (U. S. Supreme) court may assume jurisdiction to review a state court's judgment. Writ to review dismissed. (Union National Bank et al. v. McBoyle et al. 243 U. S., 26)
Liability to Depositor: The cashier of a bank, corresponding in the name of the president, who was his father, borrowed from a correspondent bank in another city a sum of money on the joint note of himself and his father secured by collateral, a portion of which was forged by the cashier. Thereafter the cashier made a deposit slip, showing a deposit in his bank by his father of the amount of the loan by check on the correspond ent bank. On being informed that his bank's account with the correspondent bank had been overdrawn, he instructed the latter to place the proceeds on the note then standing to the credit of his father to the bank's credit, which was done, and the amount was carried to the bank's credit for a month. On being informed by the president of the resignation of the cashier, the correspondent bank, without instruction, charged the amount of the note against the bank and credited the president's personal account with it, and thereafter charged the note against that credit. The receiver of the depositor bank brought action against the correspondent bank to recover that amount. Held, that the receiver was entitled to recover, there being no mistake or misunderstanding shown as to the account, since a bank cannot discharge its liability to account with the depositor to the extent of the deposit, except by the payment to him or to the holder of a written order from him. (Harriman National Bank v. Seldomridge, 240 Fed. Rep., 111.)
Knowledge of Cashier. The knowledge by a bank cashier of the forgery by him of collateral for a loan, the proceeds of which were credited to the bank, is not to be imputed to the bank, since it was to the cashier's interest to conceal the forgery.
Motion by Both Parties. Where both parties moved for direction of a verdict, there was no substantial question of fact to be decided, and, if the law was correctly applied by the trial judge, the judgment must be reaffirmed.
Rights of Accommodation Makers. One signing a note for the accommodation of another if compelled to pay it, may ordinarily recover the amount paid from the one for whose accommodation the note was made.
Liability on Note. Notes signed by the officers to obtain a loan for a bank constitute legal obligations of the bank, where the money was received by it, and all parties understood the nature of the transaction.
Rights of Principal and Surety.--Where officers of a bank executed notes for the accommodation of the bank and were compelled to pay them, the officers, being only sureties and the bank the real party in interest, are subrogated to the rights of the holders.
Validity Relief of Parties. Officers of the defendant bank, to obtain a loan for it without impairing its credit, executed their own notes. On maturity the notes were paid by plaintiff, one of the officers. The parties to the transaction intended to conceal it from the State bank commissioner. The Revised Laws of Oklahoma, 1910, section 269, provide that every officer or agent of any bank doing business under the laws of the state, who shall unlawfully and knowingly subscribe to or make any false report or false entries in the books of the bank, or knowingly subscribe or exhibit any false writing or paper, with intent to deceive any person as to the bank's condition, shall be deemed guilty of a felony and punished by fine or imprisonment or both. Held, that, as the act prescribes a specific penalty and does not declare void notes made with intent to deceive as to the condition of the bank, the notes executed by the officers were valid and enforceable against the bank in the hands of the holder, and having been paid by plaintiff, who was subrogated to the holder's rights, he could enforce them against the bank.
Acts of Officers Notes. In such case, before payment of the notes, the officers, who were the sole stockholders, transferred their stock, and the transferees in turn disposed of the stock. Held that, though the last purchasers did not know of the nature of the transaction, and the bank's liability, the bank was liable for repayment of the loan, having received the full consideration and being considered a separate entity for such purposes; this being particularly true where the last purchasers had received a written guaranty protecting them against all loss and damage by reason of any transactions or acts of the bank or its officers prior to the date of purchase.
Accountability. Where the cashier of a bank, who was president of a lumber company and authorized to draw checks for the lumber company, directed entries charging the account of the lumber company with a sum of money to be made on the books of the bank, but no check for the amount was drawn, the cashier must be held as acting for the bank in his capacity as cashier, and not as president of the lumber company.
Evidence. In a proceeding where a bank asserted, as against the estate of a bankrupt lumber company, a claim for a sum of money charged on its books against the bankrupt which had been taken by the cashier of the bank, who was the president of the bankrupt and authorized to draw checks on its account, held, under the evidence, that the bankrupt was not bound, no check having been discovered.
Right to Subrogation. Where a bank paid drafts to which were attached notes of a bankrupt lumber company, secured by liens, and marked the notes paid, the bank, having been under no duty to pay the drafts and having no interest to protect, was not subrogated to the liens securing the notes.
Civil Liability of Officers
(Liability of Directors for Mismanagement)
It is no defense against the liability of officers and directors of a national bank for permitting large overdrafts in violation of the bylaws that the practice was customary with other banks.
Liability of Directors. The statutory liability of directors of a national bank is undoubtedly the measure of the right of recovery against them for a loss resulting solely from their violation of the express provisions of the statute; but that does not exclude their common law liability for negligence in the management of the business of the bank, in violation of their oath of office which results in loss to its creditors and stockholders.
Liability of Directors. That a director of a national bank, at the time of his appointment and throughout his directorship, resided two hundred miles distant, and never attended a directors' meeting, nor gave any attention to the business of the bank, but relied entirely on those in active charge, does not relieve him for liability for losses resulting from their gross mismanagement.
Duties of Directors: Where the managing officers of a national bank allowed certain depositors to continuously overdraw, taking notes for the overdrafts without adequate security, until the indebtedness in each case exceeded the limit fixed by the statute, and were permitted by the directors to continue such course until the bank became insolvent, the liability of the directors is not limited to that prescribed by Revised Statutes, for knowingly violating or permitting the violation of the provisions of the statute, but is measured by the rule of the common law, which requires active and diligent performance of their duties, and they are liable, not only for the excess of such loans above the legal limit, but for the entire loss thereon with interest.
Degree of Care Required of Directors. Under national bank act providing that if the directors of any national banking association shall knowingly violate or knowingly permit any of its officers, etc., to violate any of the provisions of that title, every director participating therein shall be personally liable; the test of civil liability is whether the directors "knowingly" violate, or "knowingly" permit the violation of the statute.
Good Faith of Directors. Under common law principles, directors of a national bank are not answerable for mistakes or errors of judgment, however serious, if they act in good faith and no dishonesty appears.
Qualities of Directors: National bank directors must bring to the discharge of their duties reasonable and ordinary care and diligence in conducting the affairs of the corporation and are answerable for the results of negligence.
Powers. While a national bank has no power to carry on a manufacturing, mining, or trading business or to engage in a speculative enterprise, and cannot do so indirectly by the taking of stock, it may, in some cases, advance money to further an enterprise for the sole purpose of enabling it ultimately to secure a debt owing to it in some form.
Liability of Directors. A bankrupt partnership was indebted to a national bank. H. and S., one of the partners, were interested in certain timber lands, and the bank advanced money to buy the timber purchased, and bought the bonds of a lumber company to which timber was conveyed, and financed the lumber company. The lumber company's stock was divided between H., S., and the bank, but it was all to be held by the bank until advances were repaid out of dividends; and S.'s shares were also to be held until the partnership debt was paid. The directors entered into the project to recoup the bank for the partnership debt, and it was their intention to turn over all the stock to S. after the bank was paid. They acted in good faith. They caused a cruise to be made of the timber, which was substantially correct, and did not pay an excessive price therefor as the market then stood, but be cause of expensive operating expenses, much of the timber proving defective, and depressed business conditions, the enterprise caused loss to the bank. Held, that if the transaction was ultra vires, it was not clearly so, and the directors were not personally liable.
While the directors would be liable for any loss occasioned through their negligence, the question of negligence was to be determined from the facts, as they presented themselves at the time the transaction was entered into and not as illumined by subsequent events.
The directors were not guilty of negligence, but merely of an error of judgment not rendering them liable, especially as the fact that they sought to make no personal profit raised a strong presumption that they used their best judgment and skill.
Though the corporate bonds were secured by a mortgage the transaction did not amount to a loan within the statute forbidding loans on real estate or the prohibition against loans in excess of ten per cent of the capital and surplus and if it was a loan in violation of the statute, it was not a violation knowingly and intentionally rendering the directors liable.
The purchase of corporate bonds by the national bank for ninety per cent of their face value, if usurious, did not impose personal liability upon the directors where no damages were sustained thereby.
Actions to Enforce Liability
A suit for joint negligence and misconduct of national bank directors, being of a transitory nature, may, in a state having more than one federal court district, in each of which a defendant lives, be brought in either.
Bill of receiver of national bank against directors held sufficient to state civil liability for knowingly violating or permitting violation of the national banking laws.
A Federal Question. (Supreme Court) An action under Revised Statutes, section 5239, against a director of a national bank for damages sustained by an individual in consequence of violations of the national bank act, necessarily involves a federal question.
What Not Reversible Error. The court finds no reversible error in the views of the evidence or legal conclusions reached by the Circuit Court of Appeals in sustaining a judgment recovered under Revised Statutes, section 5239.
Finding a verdict and judgment excessive, the Court of Appeals gave the party who had re-covered them his option to submit to a reversal or obtain an affirmance by remitting part of the judgment. The party having acted on the latter alternative. Held, that his cross writ of error complaining of the reduction must be dismissed.
Criminal Liability of Officers
Conversion of Deposits. An indictment, alleging that defendant, the president of a national banking association, abstracted and converted its funds in violation of Revised Statutes, section 5209, averred the abstraction and conversion of a deposit made for the sole use and benefit of the depositor, charging that the property consisted of moneys, funds, and credits of the national banking association, and that the depositor was a depositor and creditor of the association, and that defendant intended to injure and defraud such association and the depositor. Held, that as, where money or its equivalent is deposited in a bank without special agreement, the law implies that it is to be mingled with other funds, and the relation of creditor and debtor is created, the deposit being general; while a special deposit is a delivery of property, securities, or money for the purpose of having the identical thing safely kept and returned to the depositor, the indictment is not bad, as charging the conversion and abstraction of a special deposit instead of the conversion of funds of a national banking association, which is the offense denounced; the allegation that the deposit was for the depositor's sole use and benefit evidently being intended to indicate that only the depositor was authorized to withdraw the funds.
Statutory Offense: Revised Statutes, section 5200, denouncing the offense of conversion or abstraction of the moneys or property of a national banking association by an officer or agent, declares that one violating the section shall be deemed guilty of a misdemeanor and shall be imprisoned not less than five nor more than ten years. The Penal Code, section 335, provides that all offenses which may be punished by death or imprisonment for a term exceeding one year shall be deemed felonies, and all other offenses denounced by section 5209 is an infamous crime, the provision for punishment was not repealed by the Penal Code, defining misdemeanors as punishable by a term not exceeding one year, the fact that the offense was classed as a misdemeanor not changing its nature.
Indictment Objections. Unless objections to the form of an indictment are pointed out by demurrer or otherwise taken advantage of on trial, such objections cannot be urged after verdict, unless they affect the substantial rights of accused.
Offenses--Indictment: An indictment charged that defendant was the president of a national banking association; that he did willfully and unlawfully abstract and convert to his own use, benefit, and advantage certain moneys, funds, and credits of the banks of the amount and value of $5,000, a more particular description of which was to the grand jury unknown, from and out of the moneys, funds, and credits of the association, and held by the same as a deposit for the sole use and benefit of a depositor and creditor of the bank, by means of an instrument designated a memorandum check, without the knowledge and consent of the banking association, and with the intent to injure and defraud the association, the depositor, and the creditor. Any officer or agent of a national banking association who shall convert or appropriate any money of the association with intent to defraud shall be guilty of an offense. Held, that the indictment was not open to attack because the property was described as certain moneys, funds, and credits of the association or specified amount in dollars; a more particular description to the grand jury being unknown.
Such indictment sufficiently charged the manner of the alleged abstraction and conversion, and, having alleged that the money was abstracted without the knowledge and consent of the association, it was unnecessary to allege that it was done without the knowledge or authority of the directors.
The indictment was sufficient, though charging that the abstraction was done by means of a memorandum check; for the means of abstraction are immaterial.
In such case, the indictment, which alleged that the money taken by defendant was converted to his own use and benefit, and to the use and benefit of another, is not open to attack on the ground that it was ambiguous and uncertain as not showing what part was received by either of the par-ties; for if the money was willfully and unlawfully abstracted, without authority and with in-tent to defraud, it was immaterial that defendant used any portion thereof. (Sheridan v. United States, 236 Federal Reports, 305.)
In such case, the indictment need not allege that the money was abstracted without the knowledge or consent of the depositors, that being a matter of defense to be shown by defendant.
Bill of Particulars. Where an indictment sufficiently charged all of the essential facts to con stitute the offense, defendant, if desirous of other details, must demand a bill of particulars.
Instructions. The evidence showed that defendant, the president of a national banking association, who had charge of loans, abstracted funds from the account of a depositor and converted the same to his own use, although it appeared that he executed in favor of the depositor a promissory note, which was never delivered, but was retained in the possession of the bank. An instruction that an officer of a national bank, who has full charge of making loans, has the right to lend any portion or all of the money deposited in the bank by depositors on general checking accounts, with-out first. obtaining permission of the directors, was refused. Held, that the instruction was properly refused, not being applicable to the facts.
Variance in Indictment. —An indictment, charging conversion and abstraction of the funds of a national banking association, with intent to defraud the association and the depositor whose account was charged with the defalcation, alleged that the abstraction was made by means of a memorandum check. The evidence showed that defendant, the president of the bank, who made the abstractions which were charged to the accounts of several depositors, in each case made memorandum checks, charging the depositors with the amount of their deposits, that in one case the memorandum check was deposited to the account of a third person, while in another it was deposited to the account of a defendant, and that notes for the amount of the unauthorized loans were executed. Held, that there was no variance between the indictment and proof.
Abstraction and Conversion. — Where the president of a national banking association converted and abstracted funds of the association by charging the depositors' accounts with amounts of purported loans which were unauthorized by the depositors, and then crediting the amounts of the loans to his own account, or that of other persons, the president must be deemed guilty of the offense of abstraction or conversion of the moneys or property of a national banking association, every man being presumed to intend the legitimate consequences of his acts.
In such case, as the deposits were made with the bank and not with the president, the fact that the president had control of the bank and dictated its policy did not render the offense embezzlement, instead of unlawful conversion and abstraction of the funds of the association, as charged.
Evidence that the account of the one to whom the president lent the money charged to have been abstracted was in overdraft at the time of the loan, while possibly immaterial, was not prejudicial.
Evidence.--In a prosecution for unlawfully converting and abstracting the funds of a national banking association with intent to defraud, where the defendant charged the amounts of his appropriations against the accounts of depositors. Held, that the question whether the depositors authorized the procedure, intending to make loans, was, under the evidence, for the jury.
Bank Powers in General
The stockholders of a national bank have the incidental power to create a pension fund to be shared by officers and employees.
Consideration for Contract. A contract by the directors of a national bank to pay a retiring president a sum of money in part consideration of his waiver of participation in a pension fund created by the bank in which he had the right to share. Held, not without consideration.
Contracts in Restraint of Trade. An agreement by the retiring president of a bank not to enter into the employment of any other bank or trust company in the same city for a term of less than a year is not invalid as against public policy.
Power to Act as Trustee.--Implied power of Congress to confer particular function upon a national bank is to be tested, not by nature of function viewed by itself, but by its relations to all functions and attributes of bank considered as an entity; necessity or appropriateness of function should be considered with reference to the situation to which it relates; and, as to what is necessary or appropriate, a court should not substitute its discretion for the discretion of Congress.
Circumstances that a function is of class subject to state regulation does not prevent Congress from authorizing national bank to exercise it; nor, would it lie with the state power to forbid this.
A business not inherently such that Congress may empower national banks to engage in it may nevertheless become appropriate to their functions if, by state law, state banking corporations, trust companies, or other rivals of national banks are permitted to carry it on.
Under section 11(k), act of December 23, 1913, establishing Federal Reserve Board, supreme court of state may entertain proceedings in nature of quo warranto, at instance of its attorney general, to test whether conduct of bank in acting as trustee, etc., is "in contravention of state or local law."
Section 11(k) of the act of December 23, 1913, establishing the Federal Reserve Board, in authorizing board to permit national banks, when not in contravention of state or local law, to act as trustees, executors, administrators, or registrars of stocks and bonds under rules and regulations to be prescribed by the board, is not objectionable as conferring legislative power, or otherwise obnoxious to Constitution.
Assessment of Shareholders.--Defendant and another, executors, seeking in good faith to follow a testamentary direction to invest a sum in "interest bearing security," on certain trusts, caused to be transferred to themselves as trustees certain national bank shares belonging to the estate. Thereafter, their final account as executors, explaining this transaction and reporting the estate wholly distributed except for these shares, was approved by the proper court of Wisconsin. The bank afterwards becoming insolvent, suit was brought by the receiver to recover the amount of an assessment levied upon the shares by the Comptroller of the Currency, the bill seeking to hold the defendant (who had received a larger amount as legatee), under a Wisconsin law making distributees liable for debts of estates in certain cases. Held (1) that whether or not the shares were "interest bearing securities," the transfer was not void; (2) title being in the trustees, the estate was not liable for the assessment, and consequently defendant could not be held as a distributee under the Wisconsin statute. At common law executors have implied authority to pass title to personal assets of the estate a rule which has not been modified in Wisconsin. Section 2091, Wisconsin Statutes, 1913, providing that conveyances made by trustees in contravention of express trusts shall be absolutely void; does not apply to personal property.
The war revenue act, Oct. 22, 1914, declares that bankers shall pay $1 for each $1,000 of capital used or employed; in estimating capital and surplus undivided profits shall be included, the amount of such annual tax being computed on the basis of the capital and undivided profits for the proceeding year, and that every person, firm, or company, and every incorporated or other bank, having a place of business where credits are opened by the deposit of money or currency, subject to be paid or remitted upon draft, check or order, or where money is loaned, shall be deemed a banker. A trust company, chartered to do a banking as well as a trust company business, which was authorized to discount commercial paper and accept drafts, and which held investments to an amount exceeding its capital, surplus, and undivided profits, opened a so-called capital investment account, to which bonds and mortgages were debited to an amount exceeding the capital, surplus and undivided profits. The trust company, while doing a trust company business, also did a considerable banking business. Held, that when a trust company is organized, obtains subscription for capital stock, and then opens its doors and begins business, its assets comprise all its property, and it is liable for taxation upon that portion of its capital and surplus actually employed in the banking business, regardless of its artificial methods of designating the employment of such property. (Anderson v. Farmers' L. & T. Co., 221 F. R., 322.)
Internal Revenue. The collector of internal revenue, having been informed by the officers of a trust company, that it was engaged in a banking business, may, without requiring a further return, when the one made by officers failed to disclose the amount of the company's capital and surplus used in the banking business, proceed to assess the tax imposed on such property by war revenue act, 1914.