H., as vice-president of a Cincinnati bank, made application to
a New York bank for a loan of $300,000. The request was granted and
that amount was placed to the credit of the Cincinnati bank upon
the books of the New York bank. Immediately thereafter, H.
fraudulently caused himself to be personally credited upon the
books of his own bank with a like sum of $300,000. The action of H.
in negotiating the above loan with the New York bank was
unauthorized by the board of directors of the Cincinnati bank, but
after the arrangement had been made, that bank drew out by check
the money that had been placed to its credit by the New York bank
and used the same in discharging its valid obligations.
Held that, by so using the money obtained from the New
York bank by H. in his capacity of vice-president, the Cincinnati
bank became bound to account for the same as for money had and
received, and could not escape liability to the New York bank upon
the mere ground, supposing it to be true, that it was not permitted
by its charter to borrow money. The fraud perpetrated by H. upon
his own bank in having himself personally credited upon its books
with the amount of the loan was a matter with which the New York
bank had no connection, and its right to recover could not be
affected thereby. The liability of the Cincinnati bank rested upon
the fact, and the implied obligation arising therefrom, that that
bank used in its business and for its benefit the money which the
other bank placed to its credit in consequence of the loan
negotiated by H., who assumed to represent it.
There is nothing in the acts of Congress authorizing or
permitting a national bank to appropriate and use the money or
property of others without incurring liability for so doing.
This case and
Western National Bank v. Armstrong,
152 U. S. 346,
distinguished.
The statement of the case will be found in the opinion of
the Court.
Page 176 U. S. 619
MR. JUSTICE HARLAN delivered the opinion of the Court.
This litigation has extended over many years, and the case as
now presented will be best understood if a statement be made
showing the proceedings in the circuit court and circuit court of
appeals.
In its bill in this case, the Chemical National Bank alleged
that, on the second day of March, 1887, it loaned to the Fidelity
National Bank the sum of $300,000, which the latter bank promised
to repay on demand with interest from the date of the loan, and at
the same time delivered as collateral security therefor a
certificate of deposit for the above amount together with sundry
promissory notes.
The certificate referred to was in the following form:
"Certificate of Deposit. This certificate is not subject to
check, but must be presented to draw the money. No. 345. The
Fidelity National Bank. Cincinnati, Feb. 28, 1887. E. L. Harper has
deposited in this bank three hundred thousand dollars ($300,000),
payable to the order of himself on return of this certificate in
current funds. $300,000. Ammi Baldwin, Cashier. Endorsed: 'E. L.
Harper.'"
It was alleged that the signature of Baldwin as cashier was used
as the signature of the bank by its authority.
The bill then stated that, on May 21, 1887, the Chemical Bank,
at the request of the Fidelity Bank, returned some of the notes
delivered as collateral security and received in substitution
therefor other notes. The latter notes were described in a schedule
attached to the bill, and it was alleged that the bank was still
the owner and holder of them, except three executed by J. W.
Wilshire for $25,000 each, which had been paid at maturity by John
v. Lewis, the endorser thereof, the money so paid being held in
lieu of the notes delivered as collateral security for the loan.
After setting forth the appointment on the 21st day of June, 1887,
of Armstrong as receiver of the Fidelity Bank, as well as the
subsequent proceedings by which on the 12th day of July, 1887, that
corporation was dissolved, the bill alleged that the Fidelity Bank
never repaid the loan nor any
Page 176 U. S. 620
part thereof; that the Chemical Bank presented to the receiver
proof of its claim and requested him to submit it to the
Comptroller of the Currency in order that a dividend might be paid
to it from the assets of the bank equal in ratio to the dividends
paid to other creditors, and that it might thereafter receive
further dividends until its claim was paid, but that the
Comptroller and the receiver had refused to allow it to be enrolled
as a creditor.
The receiver, without explicitly responding to the allegations
of the bill as to the making of the loan, said that he was unable
to state whether or not the plaintiff loaned to the Fidelity Bank
the sum of $300,000. In an amended answer, he specifically denied
that the Chemical Bank loaned to the Fidelity Bank the sum named,
or that any such loan was made by the former to the latter on the
faith and credit of the alleged certificate of deposit, or that
such certificate was executed and delivered by the cashier of the
Fidelity Bank as its act and by its authority.
The answer averred that on the second day of March, 1887, and
prior thereto, Harper was the vice-president of the Fidelity Bank,
and engaged in speculations in which he used its funds; that in the
use of those funds, he was assisted by Baldwin, but that such use
was not known to the other directors of the bank, was not
authorized by it, and was a fraudulent and illegal appropriation of
its funds for the personal use of Harper; that a paper was signed
by Baldwin, as cashier of the Fidelity Bank, which was believed to
be the same paper alleged to be a certificate of deposit of the
Fidelity Bank; that such certificate was not entered upon the books
of the bank, nor taken from the book from which, if regular, it
should have been taken; that its execution was unknown to the other
officers of the bank, and was unauthorized by it, and that no
consideration was received for it by the Fidelity Bank from Harper
or from any other person, nor was money deposited in the bank as
the basis of the certificate.
Continuing, the defendant averred that the certificate of
deposit and the promissory notes described in the bill were
forwarded to the Chemical Bank by Harper, and the sum of
Page 176 U. S. 621
$300,000 was received by him from that bank; that he represented
to the officers of the Fidelity Bank that the money was received
from a loan made to him, and by his direction was credited on his
personal account, and was thereupon drawn out and used for his
individual purposes, and that the other officers of the bank had no
knowledge that the facts were otherwise than as represented by him.
It was also averred that a large portion of the promissory notes
delivered as collateral security for the loan was the personal
property of Harper in which the Fidelity Bank had no interest.
The answer, after reciting the fact of the payment by the
endorser Lewis of the three notes made by Wilshire for $25,000
each, alleged that the fourth note of Wilshire for the same amount,
also endorsed by Lewis, was not presented for payment by plaintiff
at maturity, in consequence whereof that note was not paid and the
endorser was discharged. It was also averred that the Chemical Bank
credited the payment of the above three sums of $25,000 upon the
alleged loan of $300,000, reporting the same to the defendant as
payments on that account, and treated them in all respects as
proper credits on such loan. Payment of certain other notes since
the bringing of the action was also alleged to have been made to
the Chemical Bank.
The defendant therefore claimed that the Fidelity Bank was not
liable to the Chemical Bank for the amount of the loan, but if it
were otherwise adjudged, the defendant asked that all payments made
to the plaintiff upon the collateral paper forwarded by Harper as
security for the loan should be credited thereon; that the above
note of Wilshire, endorsed by Lewis, not having been paid in
consequence of plaintiff's neglect to present the same for payment,
should be also credited; that the balance of the collateral paper
should first be exhausted and the proceeds credited, and that the
plaintiff should be permitted to prove only the amount found due
after such credits had been made.
To the answer as amended the plaintiff filed a general
replication.
In deciding the case, the circuit court, among other things,
Page 176 U. S. 622
said:
"Conceding that the transaction of $300,000 loan was fraudulent
as between E. L. Harper and the Fidelity Bank, and that he
appropriated the entire proceeds to his individual use, the claim
of the Chemical Bank, which dealt in good faith in the transaction
and was innocent of any knowledge or participation in the fraud, is
not affected thereby. The negotiation of the loan was within the
authority of Harper as vice-president of the Fidelity Bank, and if
he used that authority fraudulently for his own advantage, the bank
that enabled him to commit the fraud must suffer from the
consequences, and not the bank that made the loan and advanced the
money under the representation and in the belief that it was
conducting a fair, legitimate business transaction with the
Fidelity Bank."
But the court held that all collections made prior to the filing
of the claim upon the collaterals held by the Chemical Bank as
security for the loan should be deducted therefrom. 50 F. 798,
802.
From this decision both parties appealed to the circuit court of
appeals. That court reversed the decree, holding upon an extended
review by Judge Taft of the adjudged cases that creditors of an
insolvent national bank could not be required,
in proving their
claims, to allow credit for any collections made after the
declared insolvency of the bank from collateral securities held by
them. 59 F. 372.
The Chemical Bank filed a petition for rehearing upon the ground
that the court had erred in fixing the amount of interest to be
allowed the bank on the dividends declared.
While that petition was under consideration by the circuit court
of appeals, this Court decided the case of
Western National
Bank v. Armstrong, 152 U. S. 346,
which related to a transaction between that bank and Harper.
Thereupon the receiver filed a petition for rehearing upon the
question as to the validity of the loan involved in the present
suit.
The above petitions for rehearing having been granted, the cause
was again heard in the circuit court of appeals, and it was there
decided that under the special facts disclosed by the evidence, and
in view of the decision in
Western National Bank v.
Armstrong, the parties should be allowed an opportunity
Page 176 U. S. 623
to introduce further evidence "upon the issue whether the
Fidelity Bank owes anything to the Chemical Bank by virtue of the
loan." The former order of the court was therefore modified, and
the decree of the circuit court was reversed and the cause
remanded, with leave to the parties to adduce such additional
evidence. 65 F. 573, 577.
The cause was again heard in the circuit court, which said:
"Upon the evidence, the finding of this court is that the power
of the Fidelity to borrow money by conducting such a transaction as
is involved in this case is established, and that the same is
legitimately within the business of banking under the National Bank
Act."
It found for the Chemical Bank on the issue defined in the
mandate of the appellate court. 76 F. 339, 345-347. The decree was
in these words:
"And the court being now fully advised, finds that the Fidelity
National Bank upon the second day of March, 1887, borrowed from the
complainant the sum of $300,000, and that, on the 21st day of June,
1887, when the Fidelity National Bank was declared insolvent, there
was due from the Fidelity National Bank to the complainant the said
sum of $305,450; that dividends have been declared from the assets
of the Fidelity National Bank to the creditors thereof at the dates
and for the rates percentum, as follows, that is to say: October
31, 1887, the first dividend of 25 percentum; June 15, 1889, the
second dividend of 10 percentum; June 30, 1890, the third dividend
of 10 percentum; August 5, 1891, the fourth dividend of 5
percentum; August 15, 1894, the fifth dividend of 8 percentum. The
court further finds that upon the 25th day of April, 1890, the
defendant rejected the claim aforesaid of the complainant, which
had been theretofore presented to him, and that, after the previous
decree of this Court upon, to-wit, the 25th day of July, 1892, said
defendant paid to said complainant the sum of $100,000 upon account
of the sum which might be due to the complainant pursuant to the
provisions for that purpose made in the decree of this court,
entered in this cause on the 8th day of July, 1892. The court finds
that there is now due this 21st day of October, 1896, to the
complainant
Page 176 U. S. 624
from the defendant the sum of $117,749.78, being the dividends
aggregating 58 percentum heretofore declared from the assets of the
Fidelity National Bank, computed upon the amount of the
complainant's claim as herein allowed, with interest on those of
said dividends which were declared prior to April 25th, 1890, from
said last-named day, and with interest upon those thereafter
declared from the dates of their declaration, respectively, after
crediting the said payment of $100,000, upon the 25th day of July,
1892, the computation being made upon the principle ordinarily
applied in partial payments. It is therefore ordered, adjudged, and
decreed that the defendant pay to the complainant the said sum of
$117,749.78, with interest thereon from said 21st day of October,
1896, and that hereafter, while any balance remains due the
complainant upon said loan, said defendant pay to complainant
dividends, calculated upon said sum of $305,450, like to those paid
to other creditors of the Fidelity National Bank."
The receiver appealed from this decree, and the circuit court of
appeals affirmed the decree of the court below. The opinion of that
court states fully the grounds upon which it held the case not to
come within the rule announced in
Western National Bank v.
Armstrong, 83 F. 556.
From that decree the receiver has appealed to this Court, the
present appellant having succeeded Armstrong.
The principal contention of the appellant is that under the
principles announced in
Western National Bank v.
Armstrong, the Fidelity National Bank incurred no liability on
account of the money obtained from the Chemical National Bank. But
the appellee insists that the language of this Court in that case,
so far as it relates to the power of a national bank as incidental
to its business to borrow money, was much broader than was
necessary for the determination of the issues then before the
court, and if interpreted as is done by the appellant, is in
conflict with the adjudged cases, inconsistent with sound
principle, and should be modified.
In the last-named case, the Western National Bank of New York
alleged that the Fidelity Bank was indebted to
Page 176 U. S. 625
it on account of a loan made May 28, 1887,
"at the special instance and request of E. L. Harper, who was
then the vice-president and general manager of the said Fidelity
National Bank, with full authority to make said loan on its
behalf,"
and which loan, it was further alleged, was secured by
collateral, signed by one Gahr and endorsed by Harper, and by the
endorsement and delivery to the Western Bank by Harper, of
certificates for 1,600 shares of the capital stock of the Fidelity
Bank. It was also alleged that the collateral was without value,
and that the stock was wholly invalid and void. The Fidelity Bank
denied that the Western Bank made any loan to it, or that it had
any connection with or interest in the transaction referred to in
the bill. The pleadings and evidence raised the question whether
Harper, in his transactions with the New York bank, could legally
bind the Fidelity Bank of which he was vice-president. This Court
said:
"It may be conceded that the New York bank acted upon the theory
that the loan was to the Ohio bank, and took the notes and
certificates of stock as collateral. But the liability of the Ohio
bank is not a necessary consequence of such a concession. It has
further to be shown that the Ohio bank was really a party to the
transaction, either by having authorized Harper to effect the loan
on its behalf or by having ratified his action and having accepted
and enjoyed the proceeds of the discount. There is no evidence
whatever that the board of directors of the Fidelity National Bank
gave any authority to Harper to borrow money on behalf of the bank,
much less to borrow so enormous a sum on so long a time. In this
respect, the complainant's case stands barely on the assertion in
the bill that 'Harper was the vice-president and general manager of
the Fidelity National Bank, with full authority to make said loan
on its behalf.' The only evidence we find in the record tending to
support such averment is found in the answer by J. Harvey Waters,
the general bookkeeper of the Fidelity National Bank, on
cross-examination wherein he stated that E. L. Harper was the
vice-president and managing officer, and that, by 'managing
officer,' he meant that Harper was
Page 176 U. S. 626
the 'general manager of the business of the bank.' No such
officer as that of 'general manager' is known or named in the
national bank acts, nor does any such office exist by usage. The
most that can be claimed in this case is that Harper acted as the
principal executive officer of the bank. It cannot be pretended
that, as such, he had power, without authority from the board, to
bind the bank by borrowing $200,000 at four months' time. It might
even be questioned whether such a transaction would be within the
power of the board of directors. The powers expressly granted are
stated in the eighth section of the National Bank Act (Rev.Stat. ยง
5136, par. 7): a national bank can"
"exercise by its board of directors, or duly authorized officers
or agents, subject to law, all such incidental powers as shall be
necessary to carry on the business of banking, by discounting and
negotiating promissory notes, drafts, bills of exchange, and other
evidences of debt; by receiving deposits; by buying and selling
exchange, coin, and bullion; by loaning money on personal security,
and by obtaining, issuing, and circulating notes."
"The power to borrow money or to give notes is not expressly
given by the act. The business of the bank is to lend, not to
borrow; to discount the notes of others, not to get its own notes
discounted. Still, as was said by this Court in the case of
First Nat. Bank of Charlotte v. Exchange Nat. Bank of
Baltimore, 92 U. S. 122,
92 U. S.
127,"
"authority is thus given in the act to transact such a banking
business as is specified, and all incidental powers necessary to
carry it on are granted."
"These powers are such as are required to meet all legitimate
demands of the authorized business, and to enable a bank to conduct
its affairs, within the general scope of its charter, safely and
prudently. This necessarily implies the right of a bank to incur
liabilities in the regular course of its business, as well as to
become the creditor of others. Nor do we doubt that a bank, in
certain circumstances, may become a temporary borrower of money.
Yet such transactions would be so much out of the course of
ordinary and legitimate banking as to require those making the loan
to see to it that the officer or agent acting
Page 176 U. S. 627
for the bank had special authority to borrow money. Even,
therefore, if it be conceded that it was within the power of the
board of directors of the Fidelity National Bank to borrow $200,000
on time, it is yet obvious that the vice-president, however general
his powers, could not exercise such a power unless specially
authorized so to do, and it is equally obvious that persons dealing
with the bank are presumed to known the extent of the general
powers of the officers. Without pursuing this part of the subject
further, we think it evident that Harper had no authority to borrow
this money, and that the bank cannot be held for his engagements,
even if made in behalf of the bank, unless ratification on the part
of the bank be shown."
In the view we take of the present case, it is not necessary to
extend this opinion by a review of the numerous authorities which,
it is contended, support the general proposition that a national
bank is entitled under the law of its creation and in the conduct
of its business to borrow money, and that the lender is not obliged
to show that the officer or agent acting for the bank had special
authority to negotiate the loan. If the present case depended upon
that question, it might be necessary to consider whether the
language in
Western National Bank v. Armstrong required
modification.
It may be well, however, to observe that this Court, in
Auten v. United States Bank of N.Y., 174 U.
S. 125,
174 U. S.
141-143, held that the borrowing of money was not out of
the usual course of banking business. We said:
"A power so useful cannot be said to be illegitimate and
declared as a matter of law to be out of the usual course of
business, and to charge everybody connected with it with knowledge
that it may be in excess of authority. It would seem, if doubtful
at all, more like a question of fact, to be resolved in the
particular case by the usage of the parties or the usage of
communities."
It is important also to observe that the Court said that
Western National Bank v. Armstrong was not to be regarded
as an adjudication to the contrary.
We may further observe that the last-named case differs from the
present case in many important particulars.
Page 176 U. S. 628
In
Western National Bank v. Armstrong, the defendant
bank did not receive or get the benefit of the money alleged to
have been loaned to it at the instance of its vice-president. This
Court took care in that case to say that it did "not appear that
the bank ever got a penny of the borrowed money or any benefit or
advantage whatever by reason of the transaction."
In the present case, it appears that the following letter, under
date of February 28, 1887, and signed by E. L. Harper as
vice-president of the Fidelity Bank, was addressed to the cashier
of the Chemical Bank:
"Enclosed herewith we hand you for credit our certificate of
deposit No. 345 for $300,000, with bills as collateral, as follows:
[here was given a list of twenty-seven notes]. We desire to keep a
large reserve with you, and we trust you will make the rate as low
as you proposed some time since. Please place the amount to our
credit and advise the rate."
This letter having been received by the Chemical Bank, its
cashier wrote to the cashier of the Fidelity Bank under date of
March 2, 1887:
"Your favor of the 28th inst. has been received. We credit
Fidelity National Bank $300,000, and shall be considerate as to the
rate of interest when the loan is paid."
Before this last letter could have reached Cincinnati, the
bookkeeper of the Fidelity Bank, acting under instructions from
Harper, credited him personally on the books of that bank with
$300,000. But the credit of $300,000 given to the Fidelity Bank on
the books of the Chemical Bank remained unaltered, and that amount
was drawn from the latter bank in the ordinary course of business
on the authorized checks of the Fidelity Bank and went to discharge
its legal obligations. And it may be added that the Fidelity Bank
had notice of the above credit in its favor, for, besides other
evidence, it was shown that in the monthly statement sent by the
Chemical Bank to the Fidelity Bank covering the transactions of
March, 1887, there appeared under the date of March 2d a credit to
the Fidelity Bank as follows: "Tem. loan, $300,000."
We have, then, a case in which a national bank, having used in
its business money which its vice-president obtained as a loan to
it from another national bank, denies all liability to
Page 176 U. S. 629
account for the same upon the ground that the loan was not
negotiated by it or by its direction, as well as upon the ground
that it could not itself have legally borrowed the money from the
other bank. Do the statutes relating to national banking
associations require that such a defense be sustained? This
question is recognized by the court as one of great importance, and
has received careful consideration in the light of the adjudged
cases. We proceed to the examination of those cases.
In
Merchants' Bank v. State
Bank, 10 Wall. 604,
77 U. S. 644,
in which one of the questions was as to the liability of a bank on
account of certain certificates issued by its cashier and of
certain purchases of gold made by him, the Court said that if the
certificates and the gold actually went into the bank which the
cashier assumed to represent, then the bank was liable for money
had and received, whatever may have been the defect in the
authority of the cashier to make the purchase.
In
Marsh v. Fulton
County, 10 Wall. 676,
77 U. S. 684,
it was held that
"the obligation to do justice rests upon all persons, natural
and artificial, and if a county obtains the money or property of
others without authority, the law, independent of any statute, will
compel restitution or compensation."
In
United States v. State Bank, 96 U. S.
30,
96 U. S. 36,
which were actions brought in the Court of Claims against the
United States to recover the amount of certain gold certificates
deposited in the Subtreasury at Boston and forwarded, after being
cancelled, to the Treasurer of the United States, and in which
transactions fraud was imputed to the cashier of the Subtreasury at
Boston, this Court said:
"In these cases and many others that might be cited, the rules
of law applicable to individuals were applied to the United States.
Here, the basis of the liability insisted upon is an implied
contract by which they might well become bound in virtue of their
corporate character. Their sovereignty is in no wise involved. . .
. Surely it ought to require neither argument nor authority to
support the proposition that, where the money or property of an
innocent person has gone into the coffers of the
Page 176 U. S. 630
nation by means of a fraud to which its agent was a party, such
money or property cannot be held by the United States against the
claim of the wronged or injured party. The agent was agent for no
such purpose. His doings were vitiated by the underlying
dishonesty, and could confer no rights upon his principal."
The rule was illustrated in
Louisiana v. Wood,
102 U. S. 294,
which was an action against a municipal corporation to compel it to
repay money received and paid into its treasury on account of bonds
sold by it, but which it had issued without authority of law. This
Court held that the law implied from what was done a contract that
the city would return the money paid to it by mistake. To the same
effect is
Chapman v. Douglas County, 107 U.
S. 348,
107 U. S.
355.
In
Parkersburg v. Brown, 106 U.
S. 487,
106 U. S. 503,
it appeared that the City of Parkersburg, West Virginia, pursuant
to an act of the legislature of that state, issued its bonds to be
loaned to persons engaged in manufacturing and to be secured by
deed of trust or mortgage on real estate. The bonds were held to be
void under the principles announced in
Loan
Association v. Topeka, 20 Wall. 655, and the
question arose whether the city was bound to account for the
property conveyed to it in trust to secure bonds so issued and
loaned to persons engaged in manufacturing. This Court said:
"Notwithstanding the invalidity of the bonds and of the trust,
the O'Briens had a right to reclaim the property and to call on the
city to account for it. The enforcement of such right is not in
affirmance of the illegal contract, but is in disaffirmance of it,
and seeks to prevent the city from retaining the benefit which it
has derived from the unlawful act. 2 Com.Cont. 109. There was no
illegality in the mere putting of the property by the O'Briens in
the hands of the city. To deny a remedy to reclaim it is to give
effect to the illegal contract. The illegality of that contract
does not arise from any moral turpitude. The property was
transferred under a contract which was merely
malum
prohibitum, and where the city was the principal offender. In
such a case, the party receiving may be made to refund to the
person from whom it has received
Page 176 U. S. 631
property for the unauthorized purpose, the value of that which
it has actually received.
White v. Franklin Bank, 22 Pick.
181;
Morville v. American Tract Society, 123 Mass. 129;
Davis v. Old Colony Railroad, 131 Mass. 258, 275,, and
cases there cited."
In
Read v. Plattsmouth, 107 U.
S. 568,
107 U. S. 575,
where the question was as to the validity of bonds issued by a
municipal corporation, the Court said:
"In the present case, the statute in question does not impose
upon the City of Plattsmouth by an arbitrary act a burden without
consent and consideration. On the contrary, upon the supposition
that the bonds issued, as to the excess over $15,000, were void
because unauthorized, the City of Plattsmouth received the money of
the plaintiff in error and applied it to the purpose intended, of
building a schoolhouse on property the title to which is confirmed
to it by the very statute now claimed to be unconstitutional, and
an obligation to restore the value thus received, kept, and used
immediately arose."
A case aptly illustrating the principle adverted to is
Logan
County Bank v. Townsend, 139 U. S. 67,
139 U. S. 74,
139 U. S. 78.
The facts in that case were these: Townsend, it was alleged, sold
to the Logan County National Bank, through its cashier, bonds of a
railroad corporation in consideration of a named sum and the
agreement of the bank that it would, upon his demand, replace the
bonds to him at the same price or less. The bank refused to comply
with the agreement to replace the bonds, and Townsend sued to
recover from it the damages sustained by him, to-wit, the
difference between the price paid by the bank and the value of the
bonds. The bank, in its defense , denied that it had any connection
with the transaction between Townsend and its cashier otherwise
than that the latter having deposited the proceeds in the bank it
had paid them to the plaintiff. Its principal defense was that the
cashier, as such, had no authority to make the contract set out,
and that the defendant had itself no right, power, or authority to
make it. Taking it to be true, as found by the jury, that the
alleged agreement was made by the cashier for the bank, and not
upon his individual account, and assuming from the record
Page 176 U. S. 632
that the bank held the bonds at the time Townsend sued, this
Court said:
"If it be assumed, in accordance with the bank's contention,
that it was without power to purchase these bonds, to be replaced
to the plaintiff on demand, the question would still remain
whether, notwithstanding the act of Congress defining and limiting
its powers, it was exempt from liability to the plaintiff for the
value of the bonds if it refused, upon demand, to replace or
surrender them at the same or a less price. It would seem, upon
defendant's theory of its powers, to be too clear to admit of
dispute that the act of Congress does not give a national bank an
absolute right to retain bonds coming into its possession by
purchase under a contract which it was without authority to make.
True, it is not under a duty to surrender possession until
reimbursed the full amount due it; it has the right to hold the
bonds as security for the return of the consideration paid for
them; but when such amount is returned or tendered back to it, and
the surrender of the bonds is demanded, its authority to retain
them no longer exists. And from the time of such demand and its
refusal to return the bonds to the vendor or owner, it becomes
liable for their value upon grounds apart from the contract under
which it obtained them. It could not rightfully hold them under or
by virtue of the contract and at the same time refuse to comply
with the terms of purchase. If the bank's want of power under the
statute to make such a contract of purchase may be pleaded in bar
of all claims against it based upon the contract -- and we are
assuming, for the purposes of this case, that it may be -- it is
bound upon demand, accompanied by a tender back of the price paid,
to surrender the bonds to its vendor. The bank, in this case,
insisting that it obtained the bonds of the plaintiff in violation
of the act of Congress, is bound, upon being made whole, to return
them to him. No exemption or immunity from this principle of right
and duty is given by the National Banking Act."
Again:
"Our conclusion upon the whole case, so far as the questions
arising in it may be reviewed by this Court, is that if the bank
had no authority to purchase the bonds in question, it is yet not
exempt, by reason of anything
Page 176 U. S. 633
in the National Banking Act, from liability to the plaintiff for
the difference between the price it paid for them and their value
at the time it refused, upon plaintiff's demand, to comply with the
contract made by it for their purchase and held onto the
bonds."
In
Central Transportation Company v. Pullman's Car
Company, 139 U. S. 24,
139 U. S. 60,
which involved the validity of a certain contract whereby one
corporation leased and transferred all its cars, contract rights,
and personal property to another corporation, and which lease was
held to be void, this Court said:
"A contract
ultra vires being unlawful and void not
because it is, in itself, immoral, but because the corporation, by
the law of its creating, is incapable of making it, the courts,
while refusing to maintain any action upon the unlawful contract,
have always striven to do justice between the parties, so far as
could be done consistently with adherence to law, by permitting
property or money, parted with on the faith of the unlawful
contract, to be recovered back or compensation to be made for it.
In such case, however, the action is not maintained upon the
unlawful contract, nor according to its terms, but on an implied
contract of the defendant to return, or, failing to do that, to
make compensation for, property or money which it has no right to
retain. To maintain such an action is not to affirm, but to
disaffirm, the unlawful contract."
This principle was recognized and enforced in
Pullman's Car
Company v. Central Transportation Company, 171 U.
S. 138,
171 U. S. 151,
in which it was said:
"The right to a recovery of the property transferred under an
illegal contract is founded upon the implied promise to return or
make compensation for it."
In
Dittey v. Dominion National Bank of Bristol, 75 F.
769, 771, which was an action against a receiver of a national bank
to recover the amount of a loan made by its president without the
knowledge of the directors and for which he gave the note of the
bank -- the object of the transaction being to cover up certain
frauds of the president -- the court, speaking by Judge Taft,
said:
"In our opinion, even if the president may not have had
authority to effect the loan, yet when he, in order to conceal his
previous embezzlement,
Page 176 U. S. 634
deposited the sum to the credit of the Citizens' Bank with its
reserve agent in New York, and it was checked out for the benefit
of the bank, the bank and its board of directors were affected with
the knowledge which Overman as its president had of the receipt of
the moneys. Having received the benefit through an agent, it is
affected with the burden of the notice which that agent had of its
reception, and therefore it became liable for money had and
received to its use from the Dominion Bank. We think the same
principle applicable in this case which was applied in the case of
Atlantic Cotton Mills v. Indian Orchard Mills, 147 Mass.
268. In that case, the treasurer of two corporations was a
defaulter in both positions. The defalcations were of longstanding,
and to avoid discovery at the annual settlement of one company, he
drew checks of the other and deposited them to the credit of the
one company in bank. The question was whether the company whose
bank account had been swelled by the checks of the other was a
debtor to the other for the deposits thus made by the common
treasurer. It was held that the company receiving the money, having
received it through the sole agency of the man who knew it to be
stolen, could only take and hold it with the burden of his
knowledge. So in this case, the bank, having received the money
through the agency of its president, could not retain it without
assuming the burden of the president's knowledge as to how it came
to be obtained. We do not see that the circumstance, in one case
that the treasurer stole the money, and in the other that the
president obtained it on the false representation that he was
authorized to borrow it for his bank, makes any reasonable
distinction between the two cases."
In
Perkins v. Boothby, 71 Me. 91, 97, the question was
as to the liability of a joint-stock company on account of notes
given by its agent for money loaned and which was appropriated to
the payment of the company's debts. The directors had no knowledge
of the loan or the appropriation of the money, unless knowledge
could be implied from the fact that those acts were done by the
agent. The defense was that the agent's want of authority to effect
the loan relieved the company
Page 176 U. S. 635
from responsibility, not only on the notes, but for any claim
under the common counts for money had and received. After observing
that, although the directors, upon receiving notice of the acts of
the agent in terms repudiated them, yet, after knowledge of the
facts, retained the benefit of the loans effected and used the
money in discharge of valid claims against the company which would
have been in force except for the unauthorized acts of the agent,
the court said:
"If liable in one case, why should not a corporation be always
liable to refund the money or property of a person which it has
obtained improperly and without consideration, or if unable to
return it, to pay for the benefit obtained thereby? To say that a
corporation cannot sue or be sued upon an
ultra vires
arrangement is one thing. To say that it may retain the proceeds
thereof which have come into its possession without making any
compensation whatever to the person from whom it has obtained them
is something very different, and savors very much of an inducement
to fraud."
Green's Brice's
Ultra Vires 618. The question whether,
upon reason and authority, the application of this principle should
be extended to municipal corporations, or whether, on the contrary,
the purposes for which such bodies are organized, the limited
powers conferred upon them, as well as considerations of public
policy and safety, may remove them from such liability is one of
great importance. It does not arise in this case.
In
Bank of Lakin v. National Bank, 57 Kan. 183, a bank
was held liable for the amount of certain notes executed in its
name by its cashier without its authority, but the proceeds of
which were received by the bank, the court saying that "a principal
cannot receive the benefits of a transaction and at the same time
deny the authority of the agent by whom it was consummated."
Without further citation of cases, we adjudge, both upon
principle and authority, that as the money of the Chemical Bank was
obtained under a loan negotiated by the vice-president of the
Fidelity Bank who assumed to represent it in the transaction, and
as the Fidelity Bank used the money so obtained in its banking
business and for its own benefit, the
Page 176 U. S. 636
latter bank, having enjoyed the fruits of the transaction,
cannot avoid accountability to the New York bank even if it were
true, as contended, that the Fidelity Bank could not, consistently
with the law of its creation, have itself borrowed the money. When,
as the result of its arrangement with Harper as vice-president, the
Chemical Bank credited the Fidelity Bank on its books with the sum
of $300,000, the former thereby undertook to pay the checks of the
latter to the extent of that credit. And as already stated, that
credit was fully exhausted by the payment of the checks of the
Fidelity Bank drawn in the ordinary course of its business. If the
latter bank in this way used the money obtained from the Chemical
Bank, it is under an implied obligation to pay it back or account
for it to the New York bank. It cannot escape liability on the
ground merely that it was not permitted by its charter to obtain
money from another bank. Suppose the Fidelity Bank, by its check
upon the Chemical Bank, had drawn the whole $300,000 at one time,
and now had the money in its possession unused? It would not be
allowed to hold the money, even if it were without power under its
charter to have borrowed it from the Chemical Bank for use in its
business. Or suppose a national bank, in violation of the act of
Congress, takes as security for a loan made by it a deed of trust
of real estate, and subsequently causes the property to be sold and
the proceeds applied in payment of its claim against the borrower,
a surplus being left in its hands which it uses in its business or
in discharge of its obligations. If sued by the borrower for the
amount of such surplus, could the bank successfully resist payment
upon the ground that the statute forbade it to make a loan of money
on real estate security? Common honesty requires this question to
be answered in the negative. But it could not be so answered if it
be true that the Fidelity Bank could use in its business and for
its benefit money obtained by one of its officers from another bank
under the pretense of a loan, and be discharged from liability
therefor upon the ground that it could not itself have directly
borrowed from the other bank the money so obtained and used. There
is nothing in the acts of Congress authorizing or permitting a
national bank to appropriate
Page 176 U. S. 637
and use the money or property of others for its benefit without
liability for so doing. If the Fidelity Bank did not itself borrow
this money from the Chemical Bank, although the latter bank in good
faith believed that it did, then the crediting of the former on the
books of the latter with $300,000 was a mistake of which the
Fidelity Bank was not entitled in equity and good conscience to
take advantage, and from which it should not be permitted to derive
profit to the prejudice of the other bank. So if the Fidelity Bank
took the benefit of that credit with knowledge of all the facts,
then its defense is without excuse, and immoral. If it innocently
availed itself of that credit without knowledge of the facts, the
principles of natural justice demand that it be held accountable
for the money of another bank which it used in its business without
giving any consideration therefor.
The fact that, after the Fidelity Bank had been credited on the
books of the Chemical Bank with the $300,000 Harper fraudulently
caused himself to be credited on the books of the Fidelity Bank
with a like sum is a matter with which the Chemical Bank had no
connection, and cannot affect its right to demand a return of the
money which went (as the Chemical Bank in good faith supposed it
would) into the treasury of the Fidelity Bank, and was by it used
in meeting its current obligations. The dishonesty of Harper in his
management of the affairs of the Fidelity Bank did not discharge
that bank from the obligation under which it came by using in its
business the money obtained by its vice-president under the guise
of a loan to the bank.
It is no defense to the claim of the Chemical Bank to say that
the directors of the Fidelity Bank were unaware of the fraudulent
acts of Harper. We do not rest our conclusion in the present case
upon any question as to diligence or want of diligence upon the
part of directors. We rest it upon the fact, and the implied
obligation arising therefrom, that the Fidelity Bank used in its
business and for its benefit the money which the Chemical Bank
placed to its credit in consequence of a loan negotiated by Harper,
who assumed to represent it.
Page 176 U. S. 638
Independently, therefore, of any question as to the scope of the
power of a national bank to borrow money to be used in its
business, we hold that the Fidelity Bank became liable to the
Chemical Bank by using the money obtained from the latter under the
arrangement made by Harper in his capacity as vice-president;
consequently, the decree recognizing the claim of the Chemical Bank
for the amount of the loan of March, 1887, was right.
2. It is assigned for error that the collections from
collaterals securing the alleged loan prior to the declaration of
dividends by the receiver were not deducted from the amount of such
loan in determining the sum upon which dividends should be paid to
the Chemical Bank, and that the Chemical Bank was not required
first to exhaust its collateral security and apply the proceeds on
its claim before proving it against the receiver for dividends.
This assignment of error was prepared by counsel prior to the
decision of this Court in
Merrill v. National Bank of
Jacksonville, 173 U. S. 131,
173 U. S. 135,
173 U. S.
146-147, in which case this Court said that the inquiry
on the merits was whether a secured creditor of an insolvent
national bank may prove and receive dividends upon the face of his
claim as it stood at the time of the declaration of insolvency,
without crediting either his collaterals or collections made
therefrom after such declaration, subject always to the proviso
that dividends must cease when from them and from collaterals
realized the claim has been paid in full. It was held that, in the
distribution of insolvent estates,
"the secured creditor is a creditor to the full amount due him
when the insolvency is declared, just as much as the unsecured
creditor is, and cannot be subjected to a different rule. And as
the basis on which all creditors are to draw dividends is the
amount of their claims at the time of the declaration of
insolvency, it necessarily results, for the purpose of fixing that
basis, that it is immaterial what collateral any particular
creditor may have. The secured creditor cannot be charged with the
estimated value of the collateral or be compelled to exhaust it
before enforcing his direct remedies against the debtor, or to
surrender it as a condition thereto,
Page 176 U. S. 639
though the receiver may redeem or be subrogated as circumstances
may require. . . . When secured creditors have received payment in
full, their right to dividends and their right to retain their
securities cease, but collections therefrom are not otherwise
material. Insolvency gives unsecured creditors no greater rights
than they had before, though through redemption or subrogation or
the realization of a surplus they may be benefited."
3. It is also insisted that the Chemical Bank should have been
required to deduct from its claim the amount, principal and
interest, of the note for $25,000 endorsed by J. V. Lewis, who, it
is alleged, was released because of its failure to take the steps
required by the rules of commercial law in order to charge him as
endorser. Upon this point, the circuit court of appeals, upon the
first hearing of this case, said:
"Our conclusion upon this main question in the case makes it
unnecessary for us to consider the other questions discussed by
counsel, which were material only in view of the position taken by
the court below on the issue just considered. If the Chemical Bank
should receive from dividends and collections payment of debt,
principal and interest, now owing to it by the Fidelity Bank, the
question would arise whether it could not properly be charged with
the note for $25,000 which, through negligence, it failed to
collect. It is quite clear, however, that dividends declared and to
be declared, together with all collections from collateral,
including as such the note just referred to, will fall far short of
paying the $300,000 and interest due the Chemical Bank on the
original debt. The question suggested, therefore, does not arise on
the facts of the case."
59 F. 372, 382. We concur in that view.
Having noticed all the questions that require consideration, the
decree below is
Affirmed.