A customary depositor in a bank in New York deposited with it a
sight draft on a railway company in Boston. It was described as a
"check" on the deposit ticket, which distinguished between "checks"
and "bills." He had made similar deposits before, never drawing
against them, the bank always reserving the right to charge
exchange and interest for the time taken in collection. The
depositor's bank book was with the bank at the time of the deposit.
No entry was made in it until some days later, and then not by
direction of the depositor. The receiving teller applied to the
cashier for instructions on the receipt of the deposit and was
directed to receive it as cash. The bank sent the draft to Boston
for collection, and it was collected there. Before that was done,
the bank in New York, which was insolvent when the transaction took
place, suspended, closed its doors, and never resumed.
Held that the question whether the bank had become the
owner of the draft or was only acting as the agent of its customer
was one of fact, rather than of law, and that there was not enough
evidence to establish that the customer understood that the bank
had become the owner of the paper.
When a bank has become hopelessly insolvent and its president
knows that it is so, it is a fraud to receive deposits of checks
from an innocent depositor ignorant of its condition, and he can
reclaim them or their proceeds, and the pleadings in this case are
so framed as to give the plaintiff in error the benefit of this
principle.
For more than five years prior to the 6th day of May, 1884, the
St. Louis and San Francisco Railway Company had an account with the
Marine National Bank of the City of New York. On the 5th day of May
of that year, it drew a sight-draft on the Atchison, Topeka and
Santa Fe Railroad Company at Boston, Massachusetts, payable to the
order of the Marine Bank, for the sum of $17,835, an amount due
from the latter company, and sent the same to the Marine Bank, with
a deposit ticket, filled up by the assistant treasurer of the San
Francisco Company, in the following words and figures:
Page 133 U. S. 567
Deposited by the St. Louis and San Francisco Railway Co. in
the Marine National Bank, May 5th, 1884
Bills . . . . . . . . . . . . . Dollars Cents
Checks. . . . . . . . . . . . . $17,835
The messenger who took the draft and deposit ticket to the bank
had no special instructions, and handed them to an assistant of the
receiving teller, who was absent at the time. The railway company's
pass-book was then, and had been since April 30, 1884, in the
possession of the bank, and no entry was made in it until some days
afterwards, and then not by direction of the railway company. The
assistant receiving teller applied to the assistant cashier for
instructions, and was by him directed to receive the draft as cash,
and it was so entered on the credit ledger of dealers with the
bank, but not with the knowledge or by the request of the railway
company. The Marine Bank sent the draft to the Atlantic National
Bank of Boston for collection and credit, and it was by that bank
presented to the Atchison Company on the 6th of May, 1884, and that
company at five minutes before one o'clock P.M. of that day,
delivered its check on the National Bank of North America to the
Atlantic Bank, which was presented for payment, and paid, to the
Atlantic Bank, on May 7, 1884. The Marine Bank was insolvent when
it received the draft, and closed its doors at twenty minutes
before eleven o'clock on the morning of the 6th of May, 1884, and
never resumed business.
Walter S. Johnston was appointed receiver of the bank on the
13th of May, 1884, and thereupon a correspondence ensued between
the receiver and the San Francisco Company which resulted in an
agreement between them that the receiver might retain the proceeds,
subject to the right of the San Francisco Company to assert its
claim thereto, which it does in this action. It is conceded that
the Marine Bank never paid or advanced anything to the San
Francisco Company on the draft, and that the latter, at the time
the draft was sent to the bank or at any time since, was not
indebted to it. The balance to the credit of the railway company in
the Marine Bank at nine o'clock A.M. on May 6, 1884, not including
the draft, was
Page 133 U. S. 568
$117,981.72, besides some checks it had drawn and which it was
obliged to take up.
The treasurer and assistant treasurer of the railway company
testified that there was no arrangement or understanding, verbal or
written, or dealing, to their knowledge, with the Marine Bank by
which the San Francisco Company was authorized or entitled to draw
against out of town paper before actual collection, and that no
drafts were ever so drawn; that they knew of no such agreement,
verbal or in writing; that they drew on what they had, and not on
what they did not have; that the railway company had no occasion to
draw against drafts or checks before collection, and did not do so,
and that the company was allowed interest on its daily balances.
Four deposits of out of town paper other than that in question were
proven to have been made under the dates of August 23, August 27,
and November 3, 1883, and April 10, 1884. The deposit tickets in
each case referred to the deposit as "checks." The deposits of
August 23d August 27th, and November 3d were made up of two items
each, but neither was marked on the tickets as cash, and there was
no evidence that either of them was. The receiving teller testified
that generally foreign paper (paper outside of the City of New
York) of large amount, when received, was marked "F," and such a
mark, in red pencil, appeared on the deposit tickets of November 3,
1883, for $17,860; of April 10, 1884, for $18,930, and of May 5,
1884, for $17,835, being the deposit in controversy. The witness
said this was done so "that, if any of the officers should ask what
certain checks consisted of -- if a large deposit -- we would be
able to tell." These drafts or checks on banks outside of the city
were kept on a slip called "Foreign and General Office Slip," and
put in a different pigeon-hole from that where domestic paper was
placed. The assistant note teller had charge of the transmission of
paper drawn on banks or persons outside of the City of New York,
and testified thus:
"Q. And all that you had to do, as it was out of town paper, was
to transmit it for collection, was it not?"
"A. And see that we got the money back again."
"Q. Those were all your duties in regard to it?"
"A. Well, I had
Page 133 U. S. 569
other duties."
"Q. What were they?"
"A. To see that the St. Louis and San Francisco Railway Company
did not deposit too many large checks as cash."
"Q. Why did you do so?"
"A. Because I had entire charge of the foreign checks. The
foreign checks are usually out five days, and that is five days'
interest, and unless those concerned kept a large balance, we
charged them exchange; and where we paid interest on the balances,
we then charged interest and exchange, where they kept large
balances, and for that reason we watched all foreign checks
deposited. . . ."
"Q. What were the instructions you received in regard to the St.
Louis and San Francisco Railway Company?"
"A. To see whether they were depositing many large foreign
checks, and how much it cost, and whether it was advisable to get
exchange from them. . . ."
"Q. Do you recollect what officer it was who gave you those
instructions?"
"A. No, sir."
"Q. Did you ever after that enforce them?"
"A. I do not understand the meaning of the word 'enforce.' I
notified the officers of all large checks deposited by the St.
Louis and San Francisco Railway Company."
"Q. How frequently?"
"A. I don't remember. As often as they came in."
This particular draft was marked "F," and put in the foreign
pigeon-hole, and credited as cash by direction of the assistant
cashier. The form of letter universally used in transmitting
foreign paper for collection was put in by defendant, and contained
this paragraph: "Please return as promptly as possible all unpaid
collections protested, unless marked thus,
X
,' when please return without protest." In the five instances of
the deposit of these out of town drafts, they were credited to the
San Francisco Company on the bank's books, and the San Francisco
Company entered and added their amount on the margin of its
checkbook.
It appeared from the evidence that the bank had been insolvent
for a year, and that it was hopelessly so on Saturday, the 3d day
of May, and until its doors were closed. The receiver said that he
got judgment for over $730,000 on the overdrafts of a firm doing
business with the bank, which overdrafts occurred in the last two
or three days in one account, and had been running for two or three
weeks in the other
Page 133 U. S. 570
account; that the overdraft in the individual account of one of
the partners amounted to $140,000; in the firm account, to
$300,000, and in the firm special account, to $350,000, most of
which was before Saturday, the 3d of May. Estimating the assets of
the bank at what they were actually worth, and not at their face
value, the deficit, according to the receiver's judgment when he
took charge, was over $1,500,000. The bank was really insolvent
from the time the indebtedness from the firm in question, which was
insolvent, grew to such a point that, if called and not paid, the
bank could not meet its obligations. The president of the Marine
Bank was a partner of that firm.
The bill in this case was filed to obtain the proceeds of the
draft as the property of the San Francisco Company, and, among
other things, alleged:
"On the said 5th day of May, it was well known to the said bank,
and to its officers, and so the fact was that the said bank was
insolvent, and, well knowing the fact, the said bank wrongfully
neglected to disclose the same to your orator, but, by continuing
business with open doors, and otherwise represented to your orator,
and all other persons dealing with it, that the said bank was
solvent, and on the faith of such representations, your orator
believed the said bank to be solvent, and had no knowledge, or
suspicion, or means of knowing that it was insolvent or in danger
of becoming so, and, acting upon such representations and relying
on the solvency of said bank, your orator delivered the said draft
to it, and the bank received the same for collection as aforesaid.
Thereafter and on the same day, the said bank, by it cashier,
endorsed the said draft as follows: 'Pay Atlantic National Bank, of
Boston, or order, for collection, for account of Marine National
Bank, of the City of New York,' and transmitted the said draft, so
endorsed, to the said Atlantic National Bank for collection."
And
"that, by reason of the premises, the said draft, when delivered
as aforesaid to the said bank, did not become the property of the
said bank, and that your orator did not part with its title to or
interest in the said draft, but that it remained
Page 133 U. S. 571
the property of your orator, and that the proceeds of the said
draft, when collected, likewise did not become the property of the
said bank or of the defendant, but remained always, and still are,
the property of your orator, and your orator is entitled to follow
them specifically into the hands of the defendant, and to recover
them from him."
Upon final hearing, the bill was dismissed, and the opinion of
the circuit court will be found reported in 27 F. 243.
Page 133 U. S. 573
MR. CHIEF JUSTICE FULLER, after stating the facts as above,
delivered the opinion of the Court.
This was not the deposit of a check on the Marine Bank itself.
In such a case, it was held in
Oddie v. National City
Bank, 45 N.Y. 735, that the check, if received and credited,
could not be charged back for want of funds. Nor was it a check on
another bank, as to which Church, C.J., remarks, a different
principle would be applied, as the presumption of agency might
arise. It was a sight draft drawn by the San Francisco Company on
its debtor in Boston, and collected through the Marine Bank's
correspondent at that place. Neither it nor the money collected
upon it passed into the hands of any third person for value. The
collection was made after the Marine Bank had closed its doors. It
is not claimed that there was any express arrangement or
understanding between the San Francisco Company and the bank that
the deposits of out of town paper should be treated as cash. Can
such an understanding be implied from the mere fact that the San
Francisco Company was credited with the draft upon the books of the
bank, as if the deposit were of money, although the deposit ticket
named it under the head of "checks," and that the company
Page 133 U. S. 574
itself added on the stubs of its checkbook such deposits to the
current amount, coupled with an alleged commercial usage to allow
good customers to draw against a credit thus created? In five years
of business between them, the San Francisco Company had never drawn
against such paper. The evidence of the bank's clerks leaves no
doubt that, as to out of town drafts for large amounts, the bank
kept track of them and reserved the right to charge exchange, and
also interest, for the average time taken in collection,
notwithstanding its agreement to pay interest on the daily
balances. This was not consistent with the theory of an
understanding between the bank and the company that the title to
this and similar drafts should pass absolutely to the bank. If the
draft had not been paid, the bank could have cancelled the credit,
as it clearly accepted no risk on the paper. The draft was entered
at its full value, which indicated that it was not discounted, but
credited for convenience and in anticipation of its payment.
It is settled law, in this Court that the holder of a bank check
cannot sue the bank for refusing payment in the absence of proof
that it was accepted by the bank or charged against the drawer,
Bank of the Republic v.
Millard, 10 Wall. 152;
First National Bank v.
Whitman, 94 U. S. 343,
94 U. S. 344;
Laclede Bank v. Schuler, 120 U. S. 511,
120 U. S. 514,
but the depositor can sue for the breach of the contract to honor
his checks. If, under the circumstances disclosed in this case, the
only balance the San Francisco Company had was made up of the
deposit of this draft, and it had drawn against it, and the bank
had declined to honor the check, could the San Francisco Company
have sustained an action on the ground of a general commercial
usage when, by the course of dealing for five years, it had never
drawn against paper so deposited? Because banks often let good
customers overdraw, do the latter thereby get the right to do so
when the bank deems it improper to permit it? Undoubtedly, if the
San Francisco Company had overdrawn, and this draft had been
credited to cover the overdraft, or if the company had drawn
against the draft, the bank could hold the paper until the account
was squared; and, if the bank had transferred the draft to one
occupying the position of a
bona
Page 133 U. S. 575
fide holder, such transfer would have conferred title
on its transferee by reason of its reputed ownership, so far as the
latter was concerned.
Metropolitan National Bank v. Loyd,
90 N.Y. 530.
In that case, as reported in 25 Hun. 101, which was affirmed in
90 N.Y. 530, the Court of Appeals remarking in reference to the
opinion that it
"so fully reviews the evidence and the authorities that we
should be content with simply expressing our concurrence, if the
case had not been sent here by that court as involving a question
of law which ought to be reviewed,"
the supreme court says that the intention that the check should
be received as cash is to be inferred from the fact that the check
was due immediately, and was drawn on a bank, and, for all purposes
of the parties, was equivalent to so much money, and such intention
is confirmed by preceding transactions, admitted by the depositor,
in which checks were deposited and entered as cash in his bankbook,
and that the custom of the bank, in its dealings with him, was to
credit him with all checks as money.
And in
Scott v. Ocean Bank, 23 N.Y. 289, it was held
that
"the property in notes or bills transmitted to a banker by his
customer, to be credited to the latter, vests in the banker only
when he has become absolutely responsible for the amount to the
depositor,"
and that
"such an obligation, previous to the collection of the bill, can
only be established by a contract to be expressly proved or
inferred from an unequivocal course of dealing."
"Every man who pays bills not then due into the hands of his
banker," said Lord Ellenborough in
Giles v. Perkins, 9
East, 11, 14,
"places them there as in the hands of his agent to obtain
payment of them when due. If the banker discount the bill or
advance money upon the credit of it, that alters the case. He then
acquires the entire property in it, or has a lien on it
pro
tanto for his advance."
If there be no bargain that the property should be changed, the
relation resembles that of principal and agent. Mere liberty to
draw does not make out such a bargain, particularly where interest
is allowed by the banker upon the bills only
Page 133 U. S. 576
from the time when their amount is received.
Ex Parte
Barkworth, 2 De G. & J. 194;
Thompson v. Giles, 2
B. & C. 422;
Ex Parte Sargeant, 1 Rose 153. The
question was one of fact, rather than of law, and we think there
should be something more in the evidence tending to establish that
the San Francisco Company understood that the bank had become owner
of the paper than these mere credits for convenience, before that
can be held to be the fact, notwithstanding it may be a recognized
usage to allow a customer to draw. So far from there being shown an
unequivocal course of dealing tending to support that conclusion,
it seems to us the tendency of the evidence is otherwise.
But if there could be any question on that branch of the case,
we are unable to see that there could be on the other. This bank
was hopelessly insolvent when the deposit was made -- made so,
apparently, by the operations of a firm of which the president of
the bank was a member. The knowledge of the president was the
knowledge of the bank.
Martin v. Webb, 110 U. S.
7;
Bank v. Walker, 130 U.
S. 267;
Cragie v. Hadley, 99 N.Y. 131. In the
latter case, it was held that the acceptance of a deposit by a bank
irretrievably insolvent constituted such a fraud as entitled the
depositor to reclaim his drafts or their proceeds. And the
Anonymous Case, 67 N.Y. 598, was approved, where a draft
was purchased from the defendants, who were bankers, when they were
hopelessly insolvent, to their knowledge, and the court held the
defendants guilty of fraud in contracting the debt, and said their
conduct was not like that of a trader
"who has become embarrassed and insolvent, and yet has
reasonable hopes that, by continuing in business, he may retrieve
his fortunes. In such a case, he may buy goods on credit, making no
false representations, without the necessary imputation of
dishonesty.
Nichols v. Pinner, 18 N.Y. 295;
Brown v.
Montgomery, 20 N. Y 287;
Johnson v. Morrell, 2 Keyes
655;
Chaffee v. Fort, 2 Lans. 81. But is it believed that
no case can be found in the books holding that a trader who was
hopelessly insolvent, knew that he could not pay his debts, and
that he must fail in business, and thus disappoint his creditors,
could honestly take
Page 133 U. S. 577
advantage of a credit induced by his apparent prosperity, and
thus obtain property which he had every reason to believe he could
never pay for. In such a case, he does an act the necessary result
of which will be to cheat and defraud another, and the intention to
cheat will be inferred."
And it was decided that
"in the case of bankers, where greater confidence is asked and
reposed, and where dishonest dealings may cause widespread
disaster, a more rigid responsibility for good faith and honest
dealing will be enforced than in the case of merchants and other
traders,"
and that
"a banker who is, to his own knowledge, hopelessly insolvent
cannot honestly continue his business and receive the money of his
customers, and although having no actual intent to cheat and
defraud a particular customer, he will be held to have intended the
inevitable consequences of his act --
i.e., to cheat and
defraud all persons whose money he receives and whom he fails to
pay before he is compelled to stop business."
The circuit court did not in the present case express any
different view, but held that the bill was not properly framed to
present the question. Certainly there must be sufficient equity
apparent on the face of a bill to warrant the court in granting the
relief prayed, and the material facts on which the complainant
relies must be so distinctly alleged as to put them in issue.
Harding v.
Handy, 11 Wheat. 103, and, if fraud is relied on,
it is not sufficient to make the charge in general terms.
"Mere words, in and of themselves and even as qualifying
adjectives of more specific charges, are not sufficient grounds of
equity jurisdiction unless the transactions to which they refer are
such as in their essential nature constitute a fraud or a breach of
trust for which a court of chancery can give relief."
Van Weel v. Winston, 115 U. S. 228,
115 U. S. 237;
Ambler v. Choteau, 107 U. S. 586,
107 U. S. 591. The
defendant should not be subjected to being taken by surprise, and
enough should be stated to justify the conclusion of law though
without undue minuteness.
The bill alleged that the bank was insolvent on the 5th day of
May; that this was well known to its officers; that it wrongfully
neglected to disclose its insolvency to complainant,
Page 133 U. S. 578
and, by continuing business and otherwise, represented to
complainant, and all other persons dealing with it, that it was
solvent; that complainant, on the faith of these representations,
believed such to be the fact without suspicion that the bank was,
or was in danger of becoming, insolvent; that, acting upon the
representations and relying on the bank's solvency, complainant
delivered the draft; that next morning the bank closed its doors,
and the draft was collected thereafter, and that, by reason of the
premises, the draft or its proceeds did not become the property of
the bank. The receiver in his answer specifically denied these
averments. We think the issue thus framed was sufficient to enable
the court to proceed to a decree. The fraudulent intention flowed
from the guilty knowledge, and the bank must be held to the
consequences of a representation which it knew to be contrary to
the fact, and upon which the complainant innocently acted. Granted
that the mere omission to disclose the insolvency, if there had
been ground for the supposition that the bank might continue in
business, would not be sufficient, there is nothing for such a
belief to rest on here. As a matter of pleading, the averment was
that the bank wrongfully neglected to make the disclosure. As a
matter of fact, the condition of the bank was so hopeless that it
was its duty to make it. The omission to specifically state in the
pleading the decree of insolvency which rendered the bank's conduct
fraudulent was not fatal, as the conclusion asserted showed the
intention of the pleader, and the particular contention could
fairly be tested on the hearing.
The decree is reversed and the cause remanded, with
directions to enter a decree in favor of the complainant according
to the prayer of the bill, and to take further proceedings in
conformity with this opinion.
MR. JUSTICE BREWER, was not a member of the Court when this case
was argued, and took no part in its decision.