Case ID: ad_139/html/0610-01.html
Source: Caselaw Access Project
Author: {"author": "Scott, J.:", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

Julius W. Krafft, Plaintiff, v. The Citizens' Bank of Dyersburg, Tennessee, Defendant.
    First Department,
    July 7, 1910.
    Banks — principal and agent — receiving draft for collection — duty towards ■ principal — facts showing negligence and bad faith — guaranty.
    Action against a bank to recover the amount of an overdraft. The plaintiff’s assignor, a bank, having discounted a draft, forwarded it to the defendant bank for collection. Upon presentation to the drawee it was paid and the defendant received the proceeds, which the drawee thereupon attached in an action against the drawer. Evidence examined, and held, that the question as to whether the defendant was guilty of negligence or bad faith towards the plaintiff’s assignor, which had sent the draft for collection, was for the jury and that it was error to direct a verdict for the defendant.
    Where a bank as agent receives a draft from another bank for collection, it owes a duty to its principal superior to that owed to its depositor, the drawee.
    A letter sent by a principal to an agent agreeing to hold the latter harmless in paying over the proceeds of a draft does not guarantee the agent against the consequences of its own negligence or bad faith.
    Where a draft is paid by the drawee the proceeds belong to one who has discounted the draft rather than to the drawer.
    Dowling, J., dissented.
    Motion by the plaintiff, Julins:W. Krafft, for a new trial upon a case containing exceptions, ordered to be heard at the Appellate Division in the first instance upon the verdict of a jury in favor of defendant, rendered .by. direction of the court after a trial at the New York Trial Term in April, 1907.
    
      H. Aaron, for the plaintiff.
    
      Percy S. Dudley, for the defendant.
   Scott, J.:

This cause comes before us upon plaintiff’s motion for a new trial, a verdict for defendant having been directed at Trial Term, and the exceptions ordered to he heard here in the first instance. Plaintiff sues as assignee of the National Bank of Commerce of St. Louis for the amount of an overdraft claimed to be due from, the defe nd ant bank. The controversy between the parties arose from the following facts. The two banks were business correspondents, and in the ordinary course of business each from time to time forwarded drafts and checks to the other for collection in the locality in which that other transacted business. On May 20, 1903, a concern known as the Bartlett Commission Company discounted with the Bank of Commerce a draft, with bill of lading attached, drawn by itself upon one H. A. Klyce, of Dyersbnrg, and received credit upon its account with the Bank of Commerce for the amount thereof, less discount. The Bartlett Commission Company was a regular customer" of the National Bank of Commerce and, during all the time covered by the matters now in dispute, had a credit balance in said bank larger than the amount represented by the draft. The National Bank of Commerce forwarded the draft to defendant, its regular correspondent, for collection, and upon presentation to Klyce, the drawee, it was promptly paid and defendant received the proceeds. Klyce immediately began an action in Tennessee against the Bartlett Commission Company to recover the sum of $250 for the “ difference in price on five cars corn not shipped.” Whether this matter had anything to do with the consideration upon which the draft was drawn does not appear. Since the Bartlett Commission Company was a non-résident of Tennessee, the action was begun by an attachment or garnishment process, and a warrant was issued to defendant calling upon it to declare whether it was indebted to the Bartlett Commission Company. The Bank of Commerce was not made a party to the action or the garnishment process. On May twenty-first, after the attachment had been served upon it, defendant wrote the following letter to the Bank of Commerce: “We write to advise that H. A. Klyce paid your No. B 1466 for $440.57 and immediately attached funds. We hand herein notice of attachment and you will note that answer is set for 30th this month. Please advise us of anything yon may wish done in this matter.” There are two features of this letter which are worthy of notice, in view of the subsequent action of defendants. In the first place the draft is spoken of as “ yours,” that is, as the property of the Bank of Commerce, and, in the second place, the latter bank is not notified to defend its own interests, but is merely asked to advise defendant what course to pursue, which involved a clear implication that defendant intended to offer to represent the Bank of Commerce, and to act as it might direct. On the following day (May twenty-second) the Bank of Commerce answered, asserting that the draft and the proceeds thereof were its property, and that under the law an attachment could not issue against the funds of a- national bank until after final judgment. The letter also requested a remittance, pointing out that, under the aw defendant would-be perfectly safe in paying over the money. On the following day (May twenty-third) defendant wrote that it was perfectly willing to pay over the proceeds of the draft, but, since there was a question of law involved, it desired to be protected by a letter guaranteeing that it should be held harmless. Such a letter was sent on May twenty-fifth, and the proceeds of the draft transmitted to the Bank of Commerce. After this correspondence, and on May thirtieth, defendant made its return to the writ of attachment: The specific question propounded to it was : “ State whether or not you are, or was at the time of the garnishment, indebted to the defendant [meaning Bartlett Commission Company], if so how and to what amount ? ”

To this defendant made answer: “We held proceeds of draft for §440.57,' drawn- by defendant on H. A. Klyce, and same was sent us by National Bank of Commerce in St. Louis, Mo.” This answer, whether by intention or ignorance, was so drawn as to convey a false impression, without actually misstating any fact. It was not a categorical answer to the question propounded, and did not state the all-important fact then well known to defendant,- that the Bank of Commerce claimed to be ’the owner of the proceeds of the draft. On the contrary it was well calculated to produce the impression that the money received in payment of the draft was the property of the Bartlett Commission Company, and that the Bank of Commerce had no interest therein, but had acted merely as a forwarder. It is not without significance that defendant did not,-as far as appears, send a copy of this answer to the Bank of Commerce. On June seventeenth, before the cause came on for trial, defendant wrote to the Bank of Commerce: On May 22, you wrote us concerning the Klyce garnishment that the Supreme Court of U. S. had ruled' on such a, question, and that you had recently had a similar case ..in Tenn. Will you please cite us to the Federal Court ruling, also some reference to the Tenn. Case. This will facilitate matters with us as the case icill come u/p for hearing' here soon.” The clear import of this letter was that defendant was preparing to defend against the attachment process, and sought authorities upon the legal question involved. The National Bank of Commerce at once replied that it had turned the matter over to its attorneys, who would write defendant on the subject. On the same day (June •eighteenth) the attorneys did write at length citing a number of decisions, and concluding with this statement: This is unquestionably the law and if judgment should be rendered against you as garnishee in your lower courts, prosecute an appeal, as an appellate forum can be reached that will sustain this position. Please advise me of the outcome.” To their letter no reply was sent, and, as it afterwards developed, the defendant did nothing in the matter except to hand a list of the authorities to the justice before whom the garnishment proceeding was pending. In view of the equivocal and misleading return made by defendant to the garnishee process, the justice may well have wondered what relevancy the authorities were supposed to have to the case before him, and it is not surprising that on July twentieth he_ rendered what is termed a conditional judgment against the garnishee. Hearing nothing from defendant the counsel for the Bank of Commerce on August seventeenth wrote to defendant asking to be advised of the disposition of the case, and on August twentieth received the following reply :

“ Dear Sir.— The letter you wrote us for National Bank of Commerce was handed by us to attorney for party attaching here and same was returned' to us, and attorney stated that was still investigating, and we heard nothing further from case till your letter was received. We have asked for standing of the case from Mr. Klyce, the party attaclring, and he said that case was set for trial the 20tli of last month and publication made, but knows "nothing further about case as his attorney had not informed him of any disposition. We judged that National Bank of Commerce'wonld pay no attention to case from their letter to us when we notified them of attachment.”

From the tone of this letter, and in view of the former correspondence, and in ignorance of the form of return made by defendant to the garnishment process, the counsel for the Bank of Commerce assumed that his view of the law liad been acquiesced in and that the case had been dropped. This letter, although it may have been true in the letter, did not state the whole truth and was certainly misleading. The fact was that just one month before it was written, on July twentieth, the justice had rendered a conditional judgment in favor of the plaintiff in the garnishment action; a fact which defendant could easily have ascertained, and very possibly knew. This judgment did' not become absolute until January 20, 1904, and at any time before that date the Bank of Commerce, if. advised that a conditional judgment had been entered, could have entered an appearance and had the cause heard on its merits. Ho word, however, was received from defendant until after the judgment .had become absolute when, on May 11,1904, defendant wrote to the Bank of Commerce that judgment had been entered and that Klyce, the plaintiff therein, demanded payment of the attached funds. Then followed a correspondence between the banks in which the Bank of Commerce, in effect, insisted that defendant had misled it, and the defendant protested that it had never understood that the Bank of Commerce expected it to defend the garnishment proceeding. Preferring, apparently, to be a defendant rather than a plaintiff, the defendant managed to overdraw its account with the Bank of Commerce- and when sued for the overdraft, sets up the judgment in the garnishment proceeding and the guaranty of indemnity as a defense. The plaintiff does not charge defendant with bad faith, and for the purposes of this appeal it is not necessary to pass upon the bona fieles of the defendant’s act. It may be remarked, however, that if defendant liad formed the deliberate purpose of favoring Klyce, who was one of its depositors, and of preventing any successful defense by the Bank of Commerce, it could not have, adopted more effective means than those which it employed. The vital question in' tliQ garnishment case was, whether the funds in defendant’s hands were the property of the Bank of Commerce, or of the Bartlett Commission Company. ■. If. they were the property of the Bank of Commerce, they were not subject to attachment. The defendant was the agent of the Bank of Commerce to collect the draft and to remit the proceeds. That duty was superior to any duty that it bore to Klyce, its depositor. It knew only the Bank of Commerce as the owner of those proceeds, and when an attack was attempted to be made on those funds by way of attachment, it was bound either to itself defend its principal’s title^ or to have unequivocally notified that principal to come in and defend itself. It did neither. It wrote to. its principal letters couched in such language as justified the belief that it was taking steps to protect the principal’s rights, and sought only assistance by way of citation of authorities. With full notice that its principal claimed absolute ownership in the funds, it made a return to the writ of attachment which was, to say the least, misleading and equivocal, and then utterly neglected to defend the proceeding, or even to notify its principal that a conditional judgment had been rendered against it.' It is a fundamental rule that an agent owes to his principal diligence and good faith in respect to the property of the principal confided to its care, and there certainly is enough in this record to convict defendant of negligence, if not of bad faith, in respect to the funds of the Bank of Commerce which it held as agent for the latter. Assuming, as we do, that the facts warrant a finding that defendant was guilty of negligence or bad faith, it cannot avail itself of the letter of indemnity written by the Bank of Commerce, for the law will not attribute to such a guaranty an intention to guarantee the defendant against the consequence of its own negligence or bad faith. (Mynard v. Syracuse, etc., R. R. Co., 71 N. Y. 183; Mitchell v. Southern R. Co., 74 S. W. Rep. 216.) The defendant urges that the judgment in the garnishee proceeding in Tennessee is a bar to this action, and in support of this plea relies upon Harris v. Balk (198 U. S. 215). It is not easy to see how the defendant can expect to take anything from that authority. In the garnishment proceeding considered in that case Balk, the creditor whose debt was attached, was a party to the proceeding. In this case the Bank of Commerce was not a party and the attachment did not run against any money that belonged to it. In that case Balk was duly and timely notified of the issue of the attachment and .afforded an opportunity to defend it. In .this, case, while the Bank of Commerce was notified of the attachment, the notification was couched in such terms as justified it in believing that defendant, its agent, would protect its interests. In that case there was no question whether Harris owed Balk the debt that was attached. In this case there was a serious doubt whether the money attached belonged to the Bartlett Commission Company, the defendant in the garnishment proceeding, and the present defendant had express and explicit knowledge that the Bank of Commerce claimed ownership thereof. Harris v. Balk,, therefore, is wholly inapplicable to the present case, except that the following succinct statement of the law condemns the defendant’s position : Generally, though, the failure on the part of the garnishee to give proper notice to his creditor of the levying of the.attachment would be such a neglect of duty on the part of the garnishee which he owed to his creditor as would prevent his availing himself of the judgment in the attachment suit as a bar to the suit of his creditor against himself, which might therefore result in his being called upon to pay.the debt twice.” Finally the defendant contends that the Bank of Commerce has lost nothing because the money attached was not in fact its property, but that of the Bartlett Commission Company. To sustain this defense reliance is placed upon Citizens' State Bank v. Cowles (180 N. Y. 346), wherein it is said that “ the mere crediting, to a depositor’s account on the books of a bank, of the amount of a check drawn upon another bank, where the depositor’s account continues to be sufficient to pay the check in case it is dishonored, does not constitute the bank a holder in due course.” Again, the authority relied on can give no comfort to the defendant because it is inapplicable to the facts of the case. If 'Klyee had refused to pay the draft, and upon being sued by the Bank of Commerce, had set up some offset or defense- against the Bartlett Commission Company, the case cited might have been applicable. But Klyce had paid the draft and the only question was whether the proceeds belonged to the Bartlett Commission Company or to the Bank of Commerce Unquestionably, as between these two the proceeds of the draft were the property of the Bank of Commerce. (Metropolitan Nat. Bank v. Loyd, 90 N. Y. 530; Ætna Nat. Bank v. Fourth Nat. Bank, 46 id. 82.) If, as we consider, a jury would be justified in finding that the defendant was guilty of negligence or bad faith towards its principal, the plaintiff’s assignor, it was error to direct a verdict for the defendant.

. The appellant’s exceptions are, therefore, sustained, the verdict set aside and a new trial granted, with costs to appellant to abide the event.

Ingraham, P. J., McLaughlin and Laughlin, JJ., concurred ; Dowling, J., dissented.

Exceptions sustained and new trial ordered, with costs to appellant to abide event. Settle order on notice.