Source: https://caselaw.findlaw.com/us-supreme-court/176/618.html
Timestamp: 2019-04-24 13:37:00+00:00

Document:
Messrs. F. W. Oldham and John W. Herron for appellant.
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 2d 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.
This certificate is not subject to check, but must be presented to draw the money.
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.
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 21st, 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 indorser thereof, the money so paid being held in lieu of the notes delivered as collateral security for the loan. [176 U.S. 618, 620] 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 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 2d 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 [176 U.S. 618, 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 indorser Lewis of the three notes made by Wilshire for $25,000 each, alleged that the fourth note of Wilshire for the same amount, also indorsed by Lewis, was not presented for payment by plaintiff at maturity, in consequence whereof that note was not paid and the indorser 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, indorsed 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, [176 U.S. 618, 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 Fed. Rep. 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. 16 U. S. App. 465, 59 Fed. Rep. 372, 8 C. C. A. 155, 28 L. R. A. 231. $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 Nat. Bank v. Armstrong, 152 U.S. 346 , 38 L. ed. 470, 14 Sup. Ct. Rep. 572, 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 Nat. Bank v. Armstrong, the parties should be allowed an opportunity [176 U.S. 618, 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. 31 U. S. App. 75, 83, 65 Fed. Rep. 573, 577, 13 C. C. A. 47, 28 L. R. A. 239.
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. 54 U. S. App. 462, 83 Fed. Rep. 556, 27 C. C. A. 601.
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 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 Nat. Bank v. Armstrong required modification.
It may be well, however, to observe that this court, in Auten v. United States Nat. Bank, 174 U.S. 125, 141 , 143 S., 43 L. ed. 920, 926, 927, 19 Sup. Ct. Rep. 628, 635, 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 Nat. Bank v. Armstrong was not to be regarded as an adjudication to the contrary.
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 [176 U.S. 618, 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' Nat. Bank v. State Nat. Bank, 10 Wall. 604, 644, 19 L. ed. 1008, 1028, 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.
The rule was illustrated in Louisiana v. Wood, 102 U.S. 294 , 26 L. ed. 153, 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, 355 , 27 S. L. ed. 378, 381, 2 Sup. Ct. Rep. 62 et seq.
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 [176 U.S. 618, 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 toappropriate [176 U.S. 618, 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. [176 U.S. 618, 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.
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 indorsed 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 indorser. 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.' 16 U. S. App. 465, 539, 59 Fed. Rep. 372, 382, 8 C. C. A. 155, 165, 28 L. R. A. 231, 238. We concur in that view.
Having noticed all the questions that require consideration, the decree below is affirmed.

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