A bank in Ohio contracted with a bank in Pennsylvania to collect
for it at par at all points west of Pennsylvania, and to remit the
1st, 11th and 21st of each month. In executing this agreement, the
Pennsylvania bank stamped upon the paper forwarded for collection,
with a stamp prepared for it by the Ohio Bank, an endorsement "Pay
to" the Ohio Bank "or order for collection for" the Pennsylvania
Bank. The Ohio bank failed, having in its hands, or in the hands of
other banks to which it had been sent for collection, proceeds of
paper sent it by the Pennsylvania Bank for collection. A receiver
being appointed, the Pennsylvania Bank brought this action to
recover such proceeds.
Held:
(1) That the relation between the banks as to uncollected paper
was that of principal and agent, and that the mere fact that a
subagent of the Ohio Bank had collected the money due on such paper
was not a commingling of those collections with the general funds
of the Ohio Bank, and did not operate to relieve them from the
trust obligation created by the agency, or create any difficulty in
specially tracing them.
(2) That if the Ohio Bank was indebted to its subagent, and the
collections, when made, were entered in their books as a credit to
such indebtedness, they were thereby reduced to possession, and
passed into the general funds of the Ohio Bank.
(3) That by the terms of the arrangement, the relation of debtor
and creditor was created when the collections were fully made, the
funds being on general deposit with the Ohio Bank, with the right
in that bank to their use until the time of remittance should
arrive.
On the 23d of November, 1887, the Commercial National Bank of
Pennsylvania filed its bill of complaint in the Circuit Court of
the United States for the Southern District of Ohio,
Page 148 U. S. 51
against David Armstrong, receiver of the Fidelity National Bank
of Cincinnati, the purpose of which bill was to charge the
defendant, as trustee of the plaintiff, for $17,460.32, certain
funds in his possession. To this bill of complaint the defendant
duly appeared and answered. After the taking of testimony, the case
was submitted on pleadings and proofs, and on the 8th of June,
1889, a decree was entered in favor of the plaintiff directing the
defendant to pay to it the sum of $7,209.59, which he was adjudged
to hold as trustee, and also whatever sums he might thereafter
receive from the receiver of the Fifth National Bank of St. Louis,
Missouri, as dividends upon the sum of $1,577.89, the amount of
paper transmitted to that bank for collection. From this decree
both parties appealed to this Court. The opinion of the circuit
court was delivered by Jackson, Circuit Judge, and will be found in
39 F. 684.
The transactions between the two banks originated in the
following letter, sent by the Fidelity National Bank to the
plaintiff:
"
U.S. Depository."
"
The Fidelity National Bank"
"
Capital, $1,000,000"
"Briggs Swift, President; E. L. Harper, vice-President; Ammi
Baldwin, cashier; Benjamin E. Hopkins, ass't cashier."
"Cincinnati, 2, 12, 1887"
"Com'l Nat. B'k, Philada., Pa."
"Gentlemen: Enclosed herewith we hand you our last statement,
showing us to be the second bank in Ohio, in deposits, in the tenth
month of our existence. We should be pleased to serve you, and
trust you will find it to your advantage to accept one of the
following propositions:"
"No. 1. We will collect all items at par, and allow 2 1/2
percent interest on daily balances, calculated monthly. We will
remit any balance you have above $2,000 in New York draft as you
direct, or ship currency at your cost for expressage."
"No. 2. Will collect at par all points west of Pennsylvania, and
remit the 1st, 11th, and 21st of each month. "
Page 148 U. S. 52
"No. 3. We will collect at par Ohio, Indiana, and Kentucky
items, and remit balance every Monday by draft on New York."
"We do not charge for exchange on propositions No. 1, 2, and
3."
"No. 4. Will collect Cincinnati items and remit daily at 40
cents per thousand, or 20 cents for $500 or less."
"National banks not in a reserve city can count all they have
with us as reserve."
"Your early reply will oblige, respectfully yours,"
"E. L. Harper
V.P."
To this letter the plaintiff replied on February 18th, accepting
proposition No. 2, and thereafter, from time to time, forwarded
paper for collection. The Fidelity Bank caused to be made and sent
to the plaintiff a rubber stamp for use in endorsing paper thus
forwarded. This stamp read as follows:
"Pay Fidelity National Bank of Cincinnati, O., or order, for
collection for Commercial Bank of Philadelphia, Pa."
"E. P. Graham, Cashier"
Business was carried on between the two banks under this
arrangement until June 20, 1887, when the Fidelity Bank failed,
having in its hands, or in the hands of other banks to which the
same had been sent by it for collection, proceeds of paper
forwarded by plaintiff after June 4, amounting to $16,851.92. The
only correspondence which took place during this time between the
parties, which can be considered as throwing any light upon the
arrangement between them, was a letter from the plaintiff of May
25, as follows:
"We don't wish to complain, but would like to understand why
your remittance to us of May 21 only included items sent you up to
May 14, and received by you on the 16. We have to explain these
things to our depositors, and wish to act intelligently on the
subject,"
and a reply in these words: "We collect at par, and include in
our remittances everything collected to date."
Page 148 U. S. 53
The conclusions of the circuit judge were that the relation
between the two banks was that of principal and agent -- a relation
which continued not only while the paper was held by the Fidelity
Bank, but after the moneys had been collected thereon, but that, in
order to enforce a trust in favor of the plaintiff as to any of the
moneys so collected, they must be specifically traceable, and that
it was not sufficient to show that by collection they had passed
into the general funds of the bank. This paper had substantially
all passed into the hands of other banks, to whom it had been sent
by the Fidelity Bank, as its subagents, and the circuit judge held
that if the Fidelity was indebted to these local banks, subagents,
and the collections, when made, were entered in their books as a
credit to such indebtedness, they must be considered as reduced to
possession, and as having passed into the general funds of the
Fidelity, but that, on the other hand, if the Fidelity was not
indebted to the subagent banks, and the collections remained in
their hands to be subsequently remitted to the Fidelity, and in
fact were paid to the receiver after his appointment, they were
specifically traceable, and were therefore subject to the trust
created by the relationship between the two banks, and payment
thereof could be enforced out of the funds in the hands of the
receiver.
Page 148 U. S. 56
MR. JUSTICE BREWER, after stating the facts in the foregoing
language, delivered the opinion of the Court.
We agree with the circuit judge that the relation created
between the banks as to uncollected paper was that of principal and
agent, and that the mere fact that a subagent of the Fidelity Bank
had collected the money due on such paper was not a mingling of
those collections with the general funds of the Fidelity, and did
not operate to relieve them from the trust obligation created by
the agency of the Fidelity, or create any difficulty in
specifically tracing them. As to such paper, the transaction may be
described thus: the plaintiff handed it to the Fidelity. The
Fidelity handed it to a subagent. The subagent collected it, and
held the specific money in hand to be delivered to the Fidelity.
Then the failure of the Fidelity came, and the specific money was
handed to its receiver. That money never became a part of the
general funds of the Fidelity. It was not applied by the subagent
in reducing the indebtedness of the Fidelity to it, but it was held
as a sum collected, to be paid over to the Fidelity, or to
whomsoever might be entitled to it. The Fidelity received the paper
as agent, and the endorsement "for collection" was notice that its
possession was that of agent, and not of owner. In
Sweeny v.
Easter, 1 Wall. 166,
68 U. S. 173,
in which there was an endorsement "for collection," Mr. Justice
Miller said:
"The words 'for collection' evidently had a meaning. That
meaning was intended to limit the effect which would have been
given to the endorsement without them, and warned the party that,
contrary to the purpose of a general or blank endorsement,
Page 148 U. S. 57
this was not intended to transfer the ownership of the note or
its proceeds."
And in
White v. Bank, 102 U. S. 658,
102 U. S. 661,
where the endorsement was "for account," the same justice, speaking
of the endorsement, said: "It does not purport to transfer the
title of the paper, or the ownership of the money when received."
The plaintiff, then, as principal, could unquestionably have
controlled the paper at any time before its payment, and this
control extended to such time as the money was received by its
agent, the Fidelity.
Butchers' &c. v. Hubbell, 117
N.Y. 384;
Manufacturers' Bank v. Continental Bank, 148
Mass. 553;
Freeman's Bank v. National Tube Works, 151
Mass. 413;
Armstrong v. National Bank of Boyerstown, 14
S.W. Rep. 411 (Court of Appeals of Kentucky);
Crown Point
National Bank v. Richmond National Bank, 76 Ind. 561. In those
cases, the suits were against subagent banks. It is true that in
most of them the collection was made by the subagent after the
avowed insolvency of the agent, but that fact we cannot think is
decisive. If, before the subagent parts with the money or credits
it upon an indebtedness of the agent bank to it, the insolvency of
the latter is disclosed, it ought not to place the funds which it
has collected, and which it knows belong to a third party, in the
hands of that insolvent agent or its assignee; and, on the other
hand, such insolvent agent has no equity in claiming that this
money, which it has not yet received, and which belongs to its
principal, should be transferred to, and mixed with, its general
funds in the hands of its assignee for the benefit of its general
creditors, and to the exclusion of the principal for whom it was
collected. Whether it be said that such funds are specifically
traceable in the possession of the subagent, or that the agent has
never reduced those funds to possession, or put itself in a
position where it could rightfully claim that it has changed the
relation of agent to that of debtor, the result is the same. The
Fidelity received this paper as agent. At the time of its
insolvency, when its right to continue in business ceased, it had
not fully performed its duties as agent and collector. It had not
received the moneys collected by its subagent. They
Page 148 U. S. 58
were traceable as separate and specific funds, and therefore the
plaintiff was entitled to have them paid out of the assets in the
hands of the receiver, for, when he collected them from these
subagents, he was in fact collecting them as the agent of the
principal. No mere bookkeeping between the Fidelity and its
subagents could change the actual status of the parties, or destroy
rights which arise out of the real facts of the transaction.
We also agree with the circuit court in its conclusions as to
those moneys collected by subagents to whom the Fidelity was in
debt, and which collections had been credited by the subagents upon
the debts of the Fidelity to them before its insolvency was
disclosed, for there the moneys had practically passed into the
hands of the Fidelity. The collection had been fully completed. It
was not a mere matter of bookkeeping between the Fidelity and its
agents. It was the same as though the money had actually reached
the vaults of the Fidelity. It was a completed transaction between
it and its subagents, and nothing was left but the settlement
between the Fidelity and the principal, the plaintiff. The
conclusions of the circuit court were based upon the idea that
these collections could not be traced, because they had passed into
the general fund of the bank. We think, however, a more
satisfactory reason is found in the fact that by the terms of the
arrangement between the plaintiff and the Fidelity, the relation of
debtor and creditor was created when the collections were fully
made. The agreement was to collect at par and remit the 1st, 11th,
and 21st of each month. Collections intermediate those dates were,
by the custom of banks, and the evident understanding of the
parties, to be mingled with the general funds of the Fidelity, and
used in its business. The fact that the intervals between the dates
for remitting were brief is immaterial. The principle is the same
as if the Fidelity was to remit only once every six months. It was
the contemplation of the parties, and must be so adjudged,
according to the ordinary custom of banking, that these collections
were not to be placed on special deposit, and held until the day
for remitting. The very fact that collections
Page 148 U. S. 59
were to be made at par shows that the compensation for the
trouble and expense of collection was understood to be the
temporary deposit of the funds thus collected, and the temporary
use thereof by the Fidelity. The case of
Marine
Bank v. Fulton Bank, 2 Wall. 252, is in point,
though it may be conceded that the facts in that tending to show
the relation of debtor and creditor are more significant than those
here. In the spring of 1861, the Fulton Bank of New York sent two
notes for collection to the Marine Bank of Chicago. There being
some trouble about currency, the Fulton Bank requested the Marine
Bank to hold the avails of the collection subject to order, and
advise amount credited. Afterwards the Marine Bank sought to pay in
the currency which it had received on the collection, then largely
depreciated, but its claim in this respect was denied; Mr. Justice
Miller, speaking for the court, saying:
"The truth, undoubtedly, is that both parties understood that,
when the money was collected, plaintiff was to have credit with the
defendant for the amount of the collection, and that defendant
would use the money in its business. Thus, the defendant was guilty
of no wrong in using the money, because it had become its own. It
was used by the bank in the same manner that it used the money
deposited with it that day by city customers, and the relation
between the two banks was the same as that between the Chicago bank
and its city depositors. It would be a waste of argument to attempt
to prove that this was a debtor and creditor relation. All deposits
made with bankers may be divided into two classes, namely, those in
which the bank becomes bailee of the depositor, the title to the
thing deposited remaining with the latter, and that other kind of
deposit of money peculiar to banking business, in which the
depositor, for his own convenience, parts with the title to his
money, and loans it to the banker, and the latter, in consideration
of the loan of the money, and the right to use it for his own
profit, agrees to refund the same amount, or any part thereof, on
demand. The case before us is not of the former class. It must be
of the latter."
That reasoning is applicable here. Bearing in mind the
Page 148 U. S. 60
custom of banks, it cannot be that the parties understood that
the collections made by the Fidelity during the intervals between
the days of remitting were to be made special deposits, but, on the
contrary, it is clear that they intended that the moneys thus
received should pass into the general funds of the bank, and be
used by it as other funds, and that, when the day for remitting
came, the remittance should be made out of such general funds.
The conclusions therefore reached by the circuit court, were
correct, and the judgment is
Affirmed.
