On error to a state court of last resort in a case involving the
liability of a national bank under a contract, the findings of fact
of the state court are binding on this Court, and only the federal
question as to the effect of the facts found can be passed on.
Although restitution of property obtained under a contract which
is illegal because
ultra vires cannot be adjudged by force
of the illegal contract, the courts will compel restitution of
property of another obtained without authority of law; and,
although the contract under which a national bank obtains money
from an innocent third party may be
ultra vires under
Rev.Stat., §§ 5133-5136, the bank may be required to return the
money so received to the party entitled thereto.
Citizens'
Central National Bank v. Appleton, Receiver, 216 U.
S. 196.
In this case, even if the purchase and carrying on of a
mercantile company by a national bank was illegal, the persons
dealing with the mercantile company were entitled to receive the
money paid into the bank for their account.
134 Wis. 565 affirmed.
The facts, which involve the liability of a national bank under
a contract claimed by the receiver to be
ultra vires, are
stated in the opinion.
Page 218 U. S. 28
MR. JUSTICE WHITE delivered the opinion of the Court.
To reverse a judgment of the Supreme Court of Wisconsin (134
Wis. 565) affirming a judgment of the Circuit Court of Green Lake
County, this writ of error is prosecuted.
The Berlin National Bank, doing business in the City of Berlin,
Green Lake County, Wisconsin, being insolvent, its doors were
closed by the Comptroller of the Currency on November 17, 1904. P.
R. Earling was subsequently appointed and qualified as receiver. On
November 27, 1906, John Emigh and O. L. Atkins, as assignees of a
large number of persons, commenced this action in the state court
against the receiver and the bank. It was, in substance, averred
that large quantities of milk had been furnished by the assignors
of the plaintiffs to a creamery known as the Jenne Creamery Company
under agreements that all the milk supplied should be converted
into butter, the butter sold, and the proceeds, less a sum agreed
upon as a compensation for for the services rendered, should be
divided
pro rata among those furnishing the milk. It was
alleged that the creamery, during the period covered by the claim,
was in fact owned by and had been operated by the bank, and that,
when the doors of the bank were closed, there were outstanding
unpaid checks for about $400 for collections made for account of
those who had supplied milk between April and September, 1904, and
that a large amount had been collected and not paid over for the
proceeds of butter made from milk furnished during October and the
first half of November, 1904. The prayer was that plaintiffs
recover from the receiver such portion of the collections as had
come into the hands of the receiver, and as to the proceeds, which
had been diverted by the bank, that plaintiffs be recognized as
general creditors, entitled to participate
pro rata in
the
Page 218 U. S. 29
distribution of the assets of the bank. The defendants
separately answered, and, except as to the allegations regarding
the incorporation of the bank, its insolvency, and the appointment
of a receiver, took issue upon the averments of the complaint.
The cause was tried by the court. The facts, as found, are thus
summarized:
For some time prior to October 1, 1902, the Jenne Creamery
Company, a Wisconsin corporation, having its principal place of
business in the City of Berlin, carried on the business of making
butter and other dairy products with milk furnished by patrons in
Green Lake and other counties. The corporation for these purposes,
besides operating its plant at Berlin, leased various other
creamery plants in the vicinity. At one time, the business was
carried on by a firm known as D. J. Jenne & Company, and after
the organization of the Jenne Creamery Company, the creamery
business was solely carried on by that corporation, the members of
the firm of Jenne & Company, however, owning all the stock of
the creamery company. The milk which the company separated was
furnished by numerous producers under agreements by which, for a
stated compensation, the creamery company agreed to make all the
milk it received into butter, to sell the same, collect the
proceeds, and to divide them
pro rata among the milk
owners, less the compensation agreed upon. The business did not
prosper. On October 1, 1902, there were outstanding unpaid checks
of the company, drawn on the Berlin bank in favor of milk
producers, to the extent of about $8,000, there being no funds on
hand to the credit of the creamery company in the bank, available
to pay the checks. On the same date, one of the firm of D. J. Jenne
& Company owed the bank $2,200, which was unsecured, and
besides was indebted to other creditors for at least $2,600. The
firm of D. J. Jenne & Company also owed the bank $5,000.
Evidently in contemplation
Page 218 U. S. 30
of securing the payment of these various debts, and to prevent
the loss which would be occasioned by the bankruptcy of the
creamery company, and upon the expectation that the situation might
be relieved by carrying on the business under a new management, an
arrangement was made between the Jennes and the Berlin bank. By
this arrangement, the entire stock of the creamery was assigned to
Brown, the cashier of the bank, and two other officers of the bank,
who, while thus becoming in form the owners of the stock, really
held it for account of the bank. The property of the partnership of
Jenne & Company and the property of the individual members of
the firm was transferred to Brown. In order to bring about these
transfers, the bank agreed to pay the outstanding checks drawn
against it by the creamery company in favor of the milk producers.
Under the arrangement, the business continued to be carried on in
the name of the Jenne Creamery company, although, from the facts
which we have just stated, it is apparent, as said by the Supreme
Court of Wisconsin,
"that the use of Brown's name was only formal, and that the
continuance in form of the corporation was only for convenience of
bookkeeping and dealing with the patrons."
Brown acted as manager of the business apparently for the
creamery company, signing and indorsing checks in the name of that
corporation as such manager, etc.
The producers of the milk were not parties to the transfer made
by the Jennes to the bank. No formal notification to them was given
of the fact that the bank in effect owned the stock of the
corporation and was virtually carrying on the business, no new
contracts were made with them in the name of the bank as the owner
of the creamery, but, so far as they were concerned, the affairs of
the creamery company were, in form, conducted as they had been
previously carried on, the producers continuing without
interruption to furnish their milk as they
Page 218 U. S. 31
had been in the habit of doing under the agreements previously
made.
The operation of the business after the transfer was not
profitable. The bank realized a few thousand dollars from the sale
of the individual property of Jenne, but when the bank ceased to do
business in November, 1904, the account of the creamery company was
apparently exhausted, and the bank had not recouped itself for the
payments made of the $8,000 of checks outstanding in October, 1902.
Besides, when the bank failed, there were outstanding checks for
$406.97, issued between April and October, 1904, and no settlement
had been made with those who had supplied milk during the month of
October and part of November, 1904, prior to the suspension of the
bank. Referring to the proceeds of the butter made from the milk
delivered by the patrons of the creamery during October and
November, 1904, the trial court, as stated by the Supreme Court of
Wisconsin, found
"that bank drafts had been received into the bank for such
butter. Such drafts ran to the Jenne Creamery Company, and were
indorsed by Brown, the cashier, and mingled with other moneys of
the bank. The total amount was $2,520.46. It was found by the court
upon careful analysis of the accounts that, at all times after the
receipt of any of said drafts, the bank had on hand an amount of
money and cash items exceeding said total, and such an amount was
turned over to the receiver upon his taking possession. It also
traced a considerable share of said drafts into the hands of the
bank's correspondents at other cities, by which they had been
collected and credited to the bank, and in each case it was found
that there remained a credit account with that correspondent larger
than the amount of such drafts sent to and collected by it, which
credit balance was turned over to the receiver after his
appointment."
Upon the facts by it found, the trial court adjudged that
Page 218 U. S. 32
$2,520.46 should be paid to the plaintiffs out of the funds in
the hands of the receiver, and that, as to the sum of the
outstanding checks given for the proceeds of butter sold prior to
October, 1904, the plaintiffs were entitled to participate
pro
rata with the other general creditors in the distribution of
the assets of the bank. As already stated, the Supreme Court of
Wisconsin affirmed the judgment.
The federal question relied on is in substance that the Berlin
bank, as a national bank, had no power to operate a creamery, and
could not therefore lawfully incur liability on account of such
operation, and hence the judgment of the state court is repugnant
to the following sections of the Revised Statutes: 5133 and 5136,
which prohibit a national banking association from doing other than
a banking business; 5134 and 5190, which prohibit such an
association from transacting the business of a bank in any other
place than where its banking house is located and that specified in
its organization certificate; 5145, which requires the affairs of
such association to be managed by not less than five directors, and
5236 and 5242, which require ratable dividends and prohibit all
transfers with a view to preference. It is true that there are
other assignments of alleged error, but we put them at once out of
view, as they in substance but assert that the court below erred in
affirming the judgment of the trial court because certain of the
facts found were not sustained by the evidence -- contentions which
are not open to our inquiry, as it is elementary that, on error to
a state court of last resort in a case of this character, the
findings of fact of the state court are binding on us.
The trial court found as a fact that, after the transfer of the
creamery property in October, 1902, some of the patrons were
informed that the officers and directors of the bank were
individually interested in the creamery, but that they were acting
for the bank was not made
Page 218 U. S. 33
known, and it was also represented to such patrons that the
creamery was in better condition than ever before, and such was
generally believed by the patrons to be a true statement of the
condition of affairs until after the failure of the defendant bank.
The supreme court, however, evidently did not consider these
circumstances material. It held that whatever the form of the
transaction, the Berlin bank acquired the creamery property from
the Jenne Creamery Company in October, 1902; that it operated the
same thereafter until the bank ceased doing business; that it "took
the milk furnished by the patrons, made the same into butter, and
sold it and collected the proceeds;" and that, by virtue of the
agreements under which the milk was furnished, the proceeds of the
sale of butter "belonged to the patrons, and was received by the
bank for them, and under a duty to pay it to them." It also decided
that, when the bank failed on demand to pay over the collections
for the butter sold prior to October, 1904, represented by
outstanding checks, an indebtedness to the owners of the money
arose. From the facts as found by the trial court, the supreme
court concluded that the receiver had received, in actual money or
in credits with correspondents, the $2,520.46 belonging to the
patrons collected for the butter made from the milk supplied in
October and November, 1904, and that the receiver did not receive
such sum as moneys of the bank upon any trust to distribute to the
creditors of the bank, but held it as trustee for the owners. In
declining to consider whether, as contended, it was beyond the
power of the bank to engage in the creamery business, the court
said:
"No authority has been cited, and we think none can be, to deny
the power of a banking corporation, or any other corporation, to
disgorge property of another which it had got into its possession
by any means whatever under a duty to disgorge. It may have had no
legal
Page 218 U. S. 34
power to take the steps by which the money of these plaintiffs'
assignors came to its hands; but having taken such steps and
obtained their money, no such absurdity exists as a legal obstacle
to its surrendering it. It would be a reproach to the law to hold
any such doctrine of inequity.
Beloit v. Heineman, 128
Wis. 398, 401."
As we are bound by the findings of fact made below, and as the
construction which the court gave to the contracts under which the
milk was furnished is also binding, since such construction
presents no question of a federal nature, it follows that all the
contentions relied upon to procure a reversal of the judgment must
rest upon the assumption that, although the milk was received under
contracts of bailment, and the proceeds arising were the property
of the milk producers, and were held by the bank for them,
nevertheless the judgment was wrong, because the bank, under the
national banking law, exceeded its powers when it virtually
acquired the stock of the creamery and operated the same through
its officers. But when the contentions thus come to be considered
in their ultimate aspect, their unsoundness is demonstrated by the
decision rendered at this term in
Citizen's Cent. National Bank
of New York v. Appleton, Receiver of the Cooper Exchange Bank
216 U. S. 196. We
say this even conceding, for the sake of the argument the
ultra
vires nature of the transaction as contended for. Although it
would suffice to refer to that case as decisive here in view of the
importance of the subject, we briefly advert to the facts of the
case to make apparent how absolutely conclusive the ruling there
made is upon the contention here presented. One Samuel owed to the
Central National Bank $10,000. Evidently the bank was not only
unwilling to lend Samuel more money, but called upon him to pay off
his existing indebtedness. Under these circumstances, it was
arranged that, if Samuel could borrow $12,000 from the Cooper
Page 218 U. S. 35
Exchange Bank, and would use $10,000 of the amount to pay his
debt to the Central National Bank, that bank would guarantee the
repayment of the loan if made by the Cooper Exchange Bank, thus
giving Samuel some further accommodation, and at the same time
placing the Central National Bank in funds to the extent of its
outstanding loan to Samuel. The loan upon the guaranty was made.
Upon the bankruptcy of Samuel and the failure to pay the loan made
by the Cooper Exchange Bank, the latter bank sued the Central
National Bank to recover under the guaranty. In the state courts,
while ultimately the
ultra vires nature of the guaranty
was not denied, recovery was allowed to the extent of the $10,000,
the amount actually received by of the Cooper Exchange Bank. This
Court, without in any respect questioning that the state court was
correct in holding that the contract of guaranty was
ultra
vires of the national bank act, nevertheless affirmed the
judgment below. Reviewing and commenting upon the rulings in
Logan County National Bank v. Townsend, 139 U. S.
67;
Aldrich v. Chemical National Bank,
176 U. S. 618;
Central Transportation Co. v. Pullman's Palace Car Co.,
139 U. S. 24, and
Pullman's Palace Car Co. v. Central Transportation Co.,
171 U. S. 136,
it was held, although restitution of property obtained under a
contract which was illegal because
ultra vires cannot be
adjudged by force of the illegal contract, yet, as the obligation
to do justice rests upon all persons, natural and artificial, if
one obtains the money or property of others without authority, the
law, independently of express contract, will compel restitution or
compensation. That this ruling is here applicable is plainly
manifested by the fact which we have previously pointed out, that
the relief afforded by the court below simply gave to the producers
so much of their property as was actually in the hands of the
receiver, and awarded them a right to recover as
Page 218 U. S. 36
general creditors of the bank to the extent only that their
property had been received and appropriated by the bank.
Affirmed.