#### Curry, by guardian, Respondent, vs. Wisconsin National Bank, Appellant.

*April 5*

April *23, 1912.*

*Banks and banking: Pledges: Negotiable paper: Bolder in due course: Payment of consideration: Burden of proof: Larcenous pledge: Bankers’ lien: Bight and duty of setoff: Application of payments.*

1. In an action by tbe true owner to recover negotiable bonds pledged to a bank by one whose title was defective, tbe burden of proof is upon tbe defendant to show that it acquired tbe title in due course, which includes proof that it paid out tbe money agreed to be paid therefor or parted irrevocably with a valuable consideration.

2. As between the true owner of tbe negotiable paper in such a case and tbe pledgee, tbe right of tbe latter to enforce tbe security is governed by tbe same rules of law as tbe right of a purchaser or indorsee of like paper; but the titles acquired are different, since where tbe innocent purchaser obtains an absolute title tbe innocent pledgee, up to tbe time of sale of tbe pledge, acquires only a lien.

3. A reserve bank which credited its correspondent bank with tbe proceeds of a personal note given by an officer of tbe latter and secured by bonds of a customer which be bad wrongfully taken, bad in addition to tbe security of such bonds a bankers’ lien *414enforceable by setoff against tbe credit balance of said correspondent bank for tbe sum so wrongfully credited.

4. Tbe pledgee bank did not in sucb case become a bolder of the bonds in due course by tbe mere crediting of tbe proceeds of tbe note, nor by subsequent payment of drafts of tbe correspondent bank to an aggregate amount exceeding tbe entire credit balance at tbe time of tbe pledge, where sucb balance was augmented from time to time by additional deposits so that it never fell below tbe amount of sucb wrongful or mistaken credit.

*5.*Tbe subsequent sending to and acceptance by the correspondent bank of a “reconcilement *sheet”*showing the debit and credit items appearing upon tbe books of tbe reserve bank, including tbe erroneous credit and tbe then existing credit balance, did not change the situation nor amount to an irrevocable application of tbe debit items to tbe payment of tbe credits thereon appearing.

6. Tbe rule governing tbe presumption of application of payments will not be applied to work injustice.

7. Where, in tbe case stated, tbe pledgee bank, when it received notice of tbe defect in tbe pledgor’s title to tbe bonds, bad and at all times bad bad in its possession a credit balance due tbe correspondent bank in excess of tbe credit given on account of tbe wrongful pledge, it bad tbe right, and it was a duty which it owed tbe true owner of tbe bonds, to revoke sucb credit and enforce its right of offset by cross-entry or otherwise.

Appeal from a judgment of tbe circuit court for Milwaukee county: J. C. Ludwig, Circuit Judge.

*Affirmed.*

*Geo. D. Van Dylce,*for tbe appellant,

contended, *inter alia„*that tbe bonds were negotiable instruments, and an innocent pledgee was a bolder in due course; that giving credit to tbe Mineral Point bank by Allen’s direction was equivalent to paying it tbe money. *Montrose Sav. B'cmlc v. Claussen,*137 Iowa, 73, 114 N. W. 547; *Sharpless v. Welsh,*4 Dali. 279 *Little Wolf River Imp. Oo. v. Jaclcson,*66 Wis. 42, 27 N. W. 625; *Sterling v. Ryan,*72 Wis. 36, 40, 37 N. W. 572; *Lane v. Magdeburg,*81 Wis. 344, 348, 51 N. W. 562; *Nat. G. R.. Go. v. Bonneville,*119 Wis. 222, 96 N. W. 558; *King v. Kelley,*51 Pa. St. 36; *Róllale Bros. v. Niall-IIeñn Go.*(G-a.) 72 S. E. 415. Tbe money was in fact paid to tbe Mineral *415Point bank because tbe sums paid out were applicable aspay-ments upon tbe earlier credits. *Fredonia Nat. Bank v. Pommel,*131 Micb. 674, 92 N. W. 348; *Drovers’ Nat. Bank v. Blue,*110 Micb. 31, 67 N. W. 1105; *Dreilling v. First Nat. Bank,*43 Kan. 197, 23 Pac. 94; *Fox v. Bank of Kansas Oity,*30 Kan. 441, 1 Pac. 789; *City Deposit B<mk v. Green,*130 Iowa, 384, 106 1ST. W. 942; *Northfield Nat. Bank v. Arndt,*132 Wis. 383, 388, 112 N. W. 451; *ü. S. Nat. Bank v. Mc-Nair,*114 N. C. 335, 19 S. E. 361; *Kehl v. Smith,*87 Wis. 212, 58 N. W. 244; *Strong v. Bowes,*102 Wis. 542, 78 N. W. 921. Tbe statement rendered and accepted between tbe banks was such an application by tbe parties. *People v. Grant,*139 Micb. 26, 102 N. W. 226; 2 Am. & Eng. Ency. of Law (2d ed.) 450, and note 2,.47l; 30 Cyc. 1237-1239.

*T. M. Priestley*and *J. D. O’Gonnor,*for tbe respondent.

Timlih;, J.

On or about November 1, 1905, tbe plaintiff left with tbe Eirst National Bank of Mineral Point, Wisconsin, for safe keeping ten bonds of tbe United States, each payable to bearer and aggregating $5,000. September 10, 1909, Phil Allen, Jr., vice-president of tbe bank last mentioned and active in its management, without authority express or implied from tbe plaintiff and under circumstances amounting to larceny, took these bonds and pledged them with tbe defendant bank as collateral security to Allen’s personal note for $5,000, and ordered tbe avails of such note to be credited to tbe bank of Mineral Point. Tbe defendant bank was one of tbe correspondents or reserve agents of tbe Mineral Point bards and carried an account with tbe latter, and credited tbe latter with $5,000 in this account. This credit was according to tbe mode of business between tbe banks, which was known to Allen, and tbe court found that tbe transaction was for tbe sole benefit of tbe Mineral Point bank. Tbis must mean that Allen, as officer of tbe latter bank, took such means to procure an additional credit of $5,000 for bis bank in tbis account.

*416On September 10, 1909, before tbe discount mentioned, the credits of the Mineral Point bank in this account exceeded its debits bj $20,343.84, and after the discount by $25,343.84. Between the date last mentioned and October 18, 1909, there were numerous debits and credits in this account to the Mineral Point bank, but during all this time the latter bank had an excess of credits which never fell below $11,000, and on October 18, 1909, its excess of credits was $15,242; but disregarding credits made after September 10, 1909, and considering only items of debit to the Mineral Point bank for moneys paid out to or for it by the defendant, the aggregate of these debit items exceeded $25,343.84. On September 30, 1909, what is known in banking as a reconcilement sheet was sent from defendant to the Mineral Point bank and accepted without objection by the latter. This began with the credit balance of the Mineral Point bank on September 1, 1909, gave the items of debit and credit between that date and September 30, 1909, including the avails of the $5,000 note in question, which was specially noted “Allen note discount,” and balanced the account by an entry on the debit side, “Balance $22,819.30.” This of course indicated an excess of credits of the Mineral Point bank to that amount.

On October 11, 1909, the Mineral Point bank was found to be insolvent and taken in charge by the United States officials under the national bank law. On October 18, 1909, this suit in equity was brought against the defendant to restrain it from selling the bonds and to recover possession thereof, and defendant was thereby fully informed of the plaintiffs ownership of the bonds and the wrongful and larcenous act of Allen by which they came in its possession. Defendant had, however, no knowledge or notice prior to this time of the title of the plaintiff or of any infirmity in Allen’s title to the bonds, and took them in pledge in due course without anything to put the defendant upon inquiry. After this action was com*417menced tbe plaintiff became insane, bence ber appearance by guardian.

Respondents argue in support of tbe judgment below tbat under sucb circumstances tbe defendant is not entitled to bold tbe bonds as against tbe plaintiff, because it bad actually and prior to tbe commencement of this action and tbe consequent notice to it of plaintiff’s title paid out nothing on account of tbe pledge and entered into no irrevocable agreement, and it was amply protected by tbe credits of tbe Mineral Point bank at all times. Tbe appellant contends tbat under tbe foregoing facts (a) tbe defendant, by crediting tbe avails of Allen’s note to tbe Mineral Point bank as requested by Allen, with tbe consent of tbe Mineral Point bank, bound itself irrevocably to Allen and to tbe Mineral Point bank; (b) tbat tbe making and acceptance of tbe reconcilement sheet on September 30, 1909, was in effect an application of all charges against tbe Mineral Point bank therein contained upon tbe earlier credit items of tbat bank appearing therein, including tbe $5,000 item in question; (c) tbat in any event tbe law would apply tbe debit charges against tbe Mineral Point bank made after September 10, 1909, to tbe earlier items of its credit, and by this legal application of payments tbe defendant bad paid out tbe avails of tbe note in question to or for tbe Mineral Point bank; (d) tbat if tbe defendant bank bad a bankers’ lien upon tbe general balance of tbe bank of Mineral Point against which it might have asserted a claim for $5,000 theretofore wrongfully credited, it was not bound to do so.

' We should first ascertain where tbe burden of proof lies, for there is no evidence showing tbat Allen paid a debt of bis to tbe Mineral Point bank by this transaction, and tbe finding of tbe trial court tbat tbe transaction was for tbe sole benefit of tbe bank of Mineral Point at least suggests tbe contrary. It appearing clearly tbat tbe title of Allen, who negotiated tbe bonds, was defective, tbe burden of proof was upon tbe de*418fendant to show that it acquired tbe title in due course. This includes proof that it paid out tbe money agreed to be paid tberefor or parted irrevocably with a valuable consideration. *Hodge v. Smith,*130 Wis. 326, 110 N. W. 192. Next we-must keep in mind, for tbe purpose of applying a cognate rule of law, that tbe defendant was not a purchaser of tbe bonds. Many cases are cited wbicb arose between the purchaser and tbe maker of negotiable paper, but they do not cover tbe whole question presented by a case like this. Tbe law of pledge, with reference to tbe negotiable character of tbe instrument and with reference to tbe right of an innocent pledgee to enforce bis security, is identical with tbe law of purchaser or indorsee of like paper. But tbe title which tbe innocent pledgee acquires is not identical with that acquired by an innocent purchaser. Tbe former acquires a perfect lien, but. always and up to tbe time of sale of tbe pledge only a *lien;*tbe latter acquires an absolute title. . We are here speaking of tbe law as between tbe owner of tbe pledge and tbe pledgee. Tbe case, therefore, is one in wbicb tbe defendant bank bad* credited to tbe bank of Mineral Point an item of $5,000 on account of a note executed for tbe bank of Mineral Point and in its behalf by one of its officers wbicb be secured by a pledge of negotiable bonds left with tbe Mineral Point bank for safe keeping, but wbicb such officer surreptitiously took and pledged to secure this note. Tbe defendant bank bad these pledged bonds as security and it also bad a bankers’ lien enforceable by setoff against tbe credit balance of tbe bank of Mineral Point for any sum theretofore wrongfully or mistakenly credited thereon. 1 Morse, Banks & Banking (4th ed.) cb. XXII.

> “If the depositor becomes bankrupt bis deposit becomes security for tbe payment of bis debt to tbe bank. If this debt, be contingent in character, or if it be a claim for unliquidated damages arising out of a contract, then tbe bank may retain possession of tbe deposit until such time as tbe probable in*419debtedness shall be ascertained, when tbe deposit may be set off against it.” Id. § 337 and cases.

A mere credit to tbe indorser in bis account witb tbe bank for tbe price of a note purchased from him by tbe bank does not make tbe bank a purchaser in due course and for value, because.it may, upon learning that a defense exists against tbe note, “tender tbe note back to tbe company and cancel tbe credit.” *Manufacturers’ Nat. Bank v.*Newell, 71 Wis. 309, 37 N. W. 420. Neither tbe equitable rule relating to tbe application of payments which applies payments made generally upon tbe earlier debit items of tbe account, except where such application would be unjust or inequitable, nor tbe implication of application of credits upon tbe older items of debit arising from tbe making and acceptance of tbe reconcilement sheet, affected or impaired tbe power of tbe defendant bank, at all times prior to and on October 18, 1909, to withdraw this credit from tbe bank of Mineral Point and so protect itself. If we assume as most favorable to tbe defendant that tbe instant case presented a situation where ordinarily and up to October 18, 1909, such theoretical application would be made, it was not irrevocable. Tbe defendant bank could not, we think, be required to resort to a legal action to protect tbe plaintiff. But that is not what is expected or required. Tbe defendant is here invoking tbe rule governing tbe legal application of payments to qualify itself to take tbe plaintiff’s property as an innocent pledgee in due course. Tbe rule refuses to lend its aid under such circumstances, where tbe defendant pledgee at tbe time it learned of plaintiff’s title to tbe bonds bad still in its bands, subject to its control and power of disposition, tbe credit which it gave tbe bank of Mineral Point for tbe avails of tbe Allen note and tbe pledged bonds. Tbe defendant bad as ample power to revoke any application of payments which it or tbe law bad theretofore made as bad tbe purchaser in *Manufacturers’ Nat. Bank v.*Newell, *supra.*Tbe rule governing tbe presumption of ap*420plication of payments will not be applied to work injustice, and tbe reconcilement sheet was in itself no actual application of payments upon particular items, but required, to give it tbe effect contended for by appellant, tbe aid of tbis same equitable rule.

We are of opinion that where a pledgee acquires negotiable securities in due course from a pledgor who has no title and who in pledge makes a larcenous disposition of tbe securities, and tbe pledgee has advanced money on tbe pledge only, by crediting, at tbe request of tbe pledgor, such moneys in tbe account of another for whose benefit tbe pledge was made and tbe money borrowed; and a credit exceeding tbis amount remains continually in such account from tbe time of pledge to tbe time of discovery by tbe pledgee of pledgor’s want of title and of tbe rights of tbe true owner, and where tbe pledgee is given by law a lien against such credit balance enforceable by offset, and has tbe right at all times up to such discovery to revoke tbe credit, be is bound to make such offset by withdrawing tbis credit by cross-entry or otherwise. This, we think, is supported by *Hazard v. Fiske,*83 N. Y. 287; *Smith v. Savin,*141 N. Y. 315, 36 N. E. 338; *Le Marchant v.*Moore, 150 N Y. 209, 44 N. E. 770; *Manufacturers’ Nat. Bank v. Newell, supra;*and it is not in conflict with *Strong v.*Bowes, 102 Wis. 542, 78 N. W. 921. In tbe latter case notice to tbe pledgee came too late to enable him to protect himself.

From what has been said, it is apparent that we do not consider tbe defendant bank, by its transaction with Allen, bound irrevocably to Allen or to tbe bank of Mineral Point to continue its credit in tbe account of tbe latter. When tbe defendant bank agreed with Allen to credit tbe avails of Allen’s note and tbe collateral bonds to tbe bank of Mineral Point, such agreement was necessarily influenced and affected by. tbe law relating to dealings between banks, and subject to tbe right of tbe defendant bank to revoke that credit whenever neces*421sary for its protection and to set off against any credit balance at any time found due to the bank of Mineral Point any demand existing in favor of the defendant bank and against the bank of Mineral Point.

It follows that the judgment of the circuit court should be affirmed.

*By the Court.*— Judgment affirmed.