# United States National Bank of New York v. First National Bank of Little Rock (64 F. 985)/Opinion of the Court

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* Case Syllabus
* Opinion of the Court
* Linked cases: 66 F. 518 79 F. 296 174 U.S. 125
THAYER, Circuit Judge, after stating the case as above, delivered the opinion of the court.
The action of the circuit court in directing a verdict for defendant seems to have been predicated upon the ground that the form of the notes in suit was such as to give notice to the plaintiff, when it received the same for discount, that they belonged to Allis; that they were not the property of the Little Rock Bank; and that said bank was merely an accommodation indorser for Allis. This view was clearly stated in the following instruction, which was given to the jury:
   "The court tells you upon this branch of the case that it conceives it to be its duty to tell you that the paper sued upon is of such a character, from its inception to its final delivery, or final indorsement by Allis and delivery to the United States National Bank of New York, as should have put that bank upon notice of Allis' want of authority. These notes, it appears clearly in evidence, were accommodation notes, every one of them. They were made payable, three of them to George R. Brown, and H. G. Allis, payable at the bank. There is nothing upon the face of this appear to show that the bank ever had anything to do with them, or that they were ever in the bank, except the indorsement of Allis, president, upon the back of them. They are made payable to the order of Brown and Allis,—three of them, and they are indorsed upon the back, 'George R. Brown and H. G. Allis.’ So if it appears from the testimony, as it does, that they were accommodation paper given to Brown and Allis, and indorsed by Brown and then by Allis, and then indorsed by Allis as president of the bank, the court tells you that that was sufficient to put any bank upon notice that he was certifying, or indorsing rather, the paper as president of the First National Bank, without authority to do so; he was indorsing his own paper, and that was enough to put any bank upon notice. That being the case, the court instructs you to find a verdict for the defendant."
As the trial court, in giving the foregoing instruction, did not lay stress on any fact other than the mere form of the notes, and as it is not pretended that the plaintiff had any information that they were accommodation notes, or any knowledge with reference to Allis' relation to the paper, except such as was conveyed by the notes themselves, the substantial question presented by the record is whether the notes were, in fact, in such form that the plaintiff ought to have known that they were the property of Allis, and that the defendant bank was merely an accommodation indorser. It will be observed that the paper showed that Allis was one of the payees in three of the notes, and that his name appeared as indorser on all [p989] of the notes immediately preceding indorsement of the Little Rock Bank. No other fact is disclosed by the notes themselves that can be regarded as having any special significance. On the other hand, it appears from the correspondence, heretofore quoted, that the request to discount the paper in controversy was contained in two letters written in behalf of the defendant bank by its cashier and president respectively. These letters were clearly official letters, such as had previously been written by the bank when other paper to a large amount had been offered by it for discount to its eastern correspondent; and we are unable to discover any statement in either of the letters, or any circumstance connected with the writing of the same, which was known to the plaintiff, that would lead any one to suspect that the paper tendered for discount was not held and owned by the Little Rock Bank, or that the discount was not sought for its benefit.
Such being the undisputed facts of the case, in deciding as to what information was given to the plaintiff by the form of the notes we must apply the well-known rule that a person purchasing negotiable paper is entitled to assume, in the absence of knowledge to the contrary, that the actual relation of every part thereto, and his interest therein is what it seems to be from the face of the paper. In the present case, the notes, when presented to the plaintiff for discount, were so drawn and indorsed as to create a presumption, on which the plaintiff was entitled to act, that they had been indorsed by Allis to the Little Rock Bank, and that the bank was the holder of the same for value. And this presumption, created by the notes themselves, was confirmed by the correspondence between two banks in relation to the proposed discount to which we have heretofore adverted. It is suggested in argument, however, that even if the notes did create the presumption that Allis had sold and indorsed them to the bank of which he was president, yet that this transaction was in itself suspicious, and should have put the purchaser of the paper upon inquiry. With reference to this suggestion, it is sufficient to say that it is not unlawful for a bank to purchase commercial paper from a person who happens to be connected with it as an officer or a director. We are not aware of any authority which maintains that a bank cannot discount paper for its officers or directors, especially if it is paper executed by a third party, and, as a matter of practice, we believe that it frequently happens that such discounts are sought and obtained. Because a man is a member of the board of directors or an officer of a given bank it does not follow, we think, that he must carry his custom elsewhere, and that he must transact his banking business with some other bank. That, in our judgment, would be an unreasonable rule, which no court ought to prescribe. It is doubtless true that a bank officer, who offers paper for discount to the bank with which he is connected, cannot himself represent the bank in such negotiation nor in any other transaction with the bank in which he has a personal adverse interest. He ought not to assume, and he cannot lawfully assume, the dual role of seller and purchaser; in the nature of things, there must be some disinterested person to represent [p990] the bank in such a transaction, as, under the law of agency, a person while acting as agent for a cannot enter into a contract with himself. Claflin v. Bank, 25 N.Y. 293; Mercantile Mut. Ins. Co. v. Hope Ins. Co., 8 Mo. App. 408. But, conceding the foregoing doctrine to be sound, it does not follow that the plaintiff was bound to assume, when it purchased the notes in controversy, that they had been unlawfully sold and indorsed to the defendant bank, and that the transaction between it and Allis, its president, was perhaps voidable. As the Little Rock Bank had an undoubted right to purchase the notes event from its president, the plaintiff was entitled to act upon the presumption, in the absence of knowledge to the contrary, that they had been lawfully acquired through the agency of some disinterested person or persons who were authorized to represent the defendant bank. So far as we can see, there was nothing on the face of the notes, or in the correspondence relating to same, which tended to rebut such presumption or to put the plaintiff on inquiry.
For these reasons we are forced to conclude that the circuit court erred in instructing the jury, as it did, in substance, that the notes in suit gave notice to the plaintiff when it received them for discount, that they were the property of Allis, and that he had indorsed them in the name of the defendant bank, for his own benefit, and probably without authority. That view of the case, which was the sole reason that induced the trial court to instruct the jury to return a verdict for the defendants, derives no support from the case of West St. Louis Savings Bank v. Shawnee County Bank, 95 U.S. 557, on which much reliance appears to have been placed by the trial court. In the latter case, the cashier of a bank borrowed money from another bank on his individual note for his own benefit, and indorsed the note in the name of the bank with which he was connected. The bank from whom the money was borrowed understood at the time that the money was to be used by the cashier for his own benefit, and that the indorsement placed on the note was an accommodation indorsement. It was held that the indorsement created no liability against the corporation whose name had been thus placed upon the paper as indorser, without authority, by its cashier. It is hardly necessary to observe that no such case is presented by the present record. In the suit at bar, the defendant bank itself offered the notes in suit for rediscount; the request for the discount was made by its president and cashier, each acting in an official capacity; the offer was accompanied with a satisfactory excuse for seeking a rediscount,—such an excuse as would naturally disarm suspicion. Moreover, the paper offered for rediscount appeared to have been regularly indorsed to the defendant bank; it was ostensibly in its possession, and the proceeds of the discount were passed to its credit and were subsequently paid out on its checks. Under these circumstances, it cannot be said that the plaintiff acted in bad faith, or that it was affected with notice that the Little Rock Bank was merely an accommodation indorser. Murray v. Lardner, 2 Wall. 110, 121; Hotchkiss v. Bank, 21 Wall. 354, 359.
It is insisted, however, that the judgment of the circuit court was [p991] for the right party, and that it ought not to be disturbed, even though the theory upon which the instruction was given was erroneous, and even though the plaintiff had the right to assume, when it discounted the notes in suit, that they belonged to the defendant bank and were being discounted for its benefit. The substance of the argument in this behalf is as follows: It is said that the transaction between the two banks, whereby the plaintiff bank acquired the paper, was either a loan to the defendant bank of $31,871.27, that sum being the proceeds of the discount of December 16, 1892, or that the transaction was a rediscount; that, in either event, the transaction was so far outside of the usual course of banking business, as ordinarily conducted, that neither the president nor the cashier of the defendant bank had any authority to enter into the negotiation without the prior sanction of its board of directors. Hence it is urged that the plaintiff's title is defective; that it did not acquire the paper in the usual and ordinary course of business; and that it is not a bona fide holder, because the board of directors of the Little Rock Bank did not authorize the loan or rediscount or subsequently ratify it. The proposition last stated appears to be mainly founded on the decision in Bank v. Armstrong, 152 U.S. 346, 14 Sup. Ct. 572, which decides, in substance, that the borrowing of money by a national bank, though not illegal, is so much out of the course of ordinary and legitimate banking business as to require those making the loan to see to it that the officer or agent acting for the bank has special authority to borrow money. With reference to this contention, and, as a reason for refusing to consider it upon the merits at this time, we remark, in the first place, that no such question appears to have been considered and decided by the trial court, and, in the second place, that the answer filed by the defendants did not, as we think, fairly present such a defense. The answer undoubtedly raised the issue that was decided by the circuit court, that is to say, it denied that the notes described in the plaintiff's complaint were ever indorsed and delivered to the defendant bank; it denied that the said notes were ever the property of or in the possession of said bank; it denied that said bank ever indorsed or delivered the notes to the plaintiff, or that said bank ever received any consideration for the indorsement and delivery of the same. On the other hand, the defense attempted to be made in this court is of a contradictory character, in that it concedes the ownership and possession of the paper by the defendant bank, and attempts to avoid the sale of the notes to the plaintiff, on the ground that its president and cashier acted without authority, express or implied, in making the sale. We think that the answer was insufficient to raise a defense of this character, and that the judgment cannot be supported in this court upon the ground last above stated.
An attempt is also made in this court to sustain the judgment below on account of certain alleged defects in the proceedings taken at the maturity of the notes in suit, to fix the liability of the defendant bank as an indorser thereon. The notes were each payable at the First National Bank of Little Rock, Ark. The answer averred that, at the maturity of the paper, said bank had ceased to do business, that the makers of the notes resided in Little Rock, and that no [p992] demand was made upon them for payment, and that no notice of dishonor was given to any person who was authorized to receive such notice for and in behalf of the defendant bank. While the answer contained this allegation as to the insufficiency of the demand and notice of dishonor, yet the dishonor, yet the defense so pleaded seems to have abandoned at the trial. No objection was made to the several certificates of protest when they were introduced in evidence, and no instructions were either asked or given touching the adequacy of the proof to fix the liability of the defendant bank as an indorser. If, instead of a verdict in its favor, a judgment had been rendered against the defendant, it is clear that the alleged defect in the proceedings taken to fix the indorser's liability, which is now relied upon to sustain the judgment, would not have been available in this court as a ground for reversal. We think, therefore, that, under these circumstances, the supposed defect last mentioned will not serve to support a verdict that is otherwise clearly erroneous. It is a mistake to suppose that a defense which was clearly abandoned at the trial can be invoked in an appellate court to sustain a judgment that was rendered in pursuance of an erroneous view as to the merits of some other defense. For the reasons heretofore indicated, the judgment is reversed, and the case is remanded, with directions to aware a new trial.