Case Name: The Importers & Traders' National Bank of New York, Pl'ff, v. William A. Peters, as Receiver of the Exchange National Bank of Norfolk, Virginia, Def't and App'lt; Everett Brothers, Gibson & Co., Def'ts and Resp'ts
Court: New York Court of Appeals
Jurisdiction: New York
Decision Date: 1890-10-07
Citations: 33 N.Y. St. Rep. 182
Docket Number: 
Parties: The Importers & Traders’ National Bank of New York, Pl’ff, v. William A. Peters, as Receiver of the Exchange National Bank of Norfolk, Virginia, Def’t and App’lt; Everett Brothers, Gibson & Co., Def’ts and Resp’ts.
Judges: 
Reporter: New York State Reporter
Volume: 33
Pages: 182–186

Head Matter:
The Importers & Traders’ National Bank of New York, Pl’ff, v. William A. Peters, as Receiver of the Exchange National Bank of Norfolk, Virginia, Def’t and App’lt; Everett Brothers, Gibson & Co., Def’ts and Resp’ts.
(Court of Appeals,
Filed October 7, 1890.)
1. Banks—Receipt of draft for collection by insolvent bank a
FRAUD.
On April 2, the Exchange National Bank of Norfolk, having $7,207 on deposit with the plaintiff, failed, and Peters was appointed receiver. The receiver and other claimants brought actions to recover the fund, and this action of interpleader was brought, upon which the usual order was entered and the money paid into court. On March 30th, Everett Brothers, Gibson & Co. had deposited with the Exchange Bank, for collection only, their sight draft on M. & Co. of New York, for $12,303, and it was on the same day endorsed and forwarded to plaintiff which, on March 31st, collected the same of the drawee and credited it to the Exchange Bank. Notice of the suspension of the Exchange Bank was not received by plaintiff until April 2. The Exchange Bank had been hopelessly insolvent for six months. Seld, that the drawers of the draft had the right, under the circumstances, to reclaim it or the proceeds, upon discovery of the facts, from any one to whose hands it came, not a bona fide holder.
2. Same.
When money held by a person in a fiduciary capacity has been paid or deposited by him on his general account at a bank, the party for whom the money is held can follow it and has a charge on the balance in the banker’s hands; and, if a person holding money in a fiduciary capacity pays it to his account at his banker’s, and mixes it with his own money, and afterwards draws out sums by checks, generally, and in the ordinary manner, the drawer of the checks must be taken to have drawn out his own in preference to the trust money. The rule attributing the first drawings out to ihe first payments in, does not apply to such a case.
3. Same.
Previous to the discovery of the fraud on the part of the bank by E. Bros. & G., they proved their claim and received a dividend from Peters, but subsequently refused to receive a second dividend so far as it covered . the draft, and allowed to the receiver, out of the second dividend, exclusive of the draft, the amount received on the first dividend. Held, that they were not bound to return the identical money received.
(Earl, J.. dissents.)
Appeal from judgment of the supreme court, general term, first department, modifying and affirming judgment of special term in favor of respondents.
Geo. W. Wingate, for app’lt; Joseph Larocgue, for resp’ts.
Affirming 21 N. Y. State Rep., 98.

Opinion:
O'Brien, J.
On the 2d day of April, 1885, the plaintiff, a national banking association in the city of Rew York, had on deposit to the credit of the Exchange Rational Bank of Rorfolk, Virginia, the sum of $7,207.36, and on the same day the latter bank, being insolvent, failed, suspended payment, and ceased to transact business. The defendant Peters was subsequently appointed receiver. In August, 1885, when this suit was commenced, there were two actions pending against the plaintiff in the supreme court for the recovery of the fund above mentioned. One of the actions was brought by the receiver, claiming to be entitled to the money as the representative of creditors, and the other by the defendants, Everett Brothers, Gibson & Company, merchants at Norfolk, and who claimed to be entitled to the fund on the ground that it represented the proceeds of paper collected by the defendant bank for them, but to which paper, nor the proceeds, the bank had no title. The plaintiff then brought this action, stating in the complaint that it had the fund but was ignorant whether it belonged to the receiver or to Everett Brothers, Gibson & Company, that it was willing and desirous to pay the same into court or to such custodian as the court might designate, and prayed that it might be permitted to do so and that then the defendants, the receiver and the Norfolk claimants, be required to interplead with each other concerning their respective rights to the same. Each of the defendants answered, setting up their respective claims to the fund as above stated, and offered to allow the plaintiff to pay the fund into court.
Subsequently an order, in the nature of an interlocutory judgment, was entered in the action by which it was adjudged that the complaint was properly filed; that the plaintiff pay the fund into court and be dismissed from further liability; that the defendants be restrained from further prosecuting their respective actions against the plaintiff concerning the fund; that the defendants litigate and settle the matters in controversy and their respective rights to the money so paid in between themselves. Thenceforth the litigation proceeded between the defendants, who claimed the fund, upon their respective answers and the plaintiff, as an active interested litigant, disappeared from the case. The trial court held that the defendants, Everett Brothers, Gibson & Company, were entitled to the fund as against the receiver of the Exchange Bank. The general term modified the judgment by reducing the recovery to $5,349.45, and from this determination the receiver-appeals to this court. The answer of the Norfolk claimants states, and the trial court found, certain important facts in their favor, which, in the process of working out the result reached in the courts below, were fundamental.
(1). That on the 30th day of March, 1885, Everett Brothers, Gibson & Company, deposited with the Exchange Bank at Norfolk, for collection only, what is designated in the case as an out of town draft, to wit., their sight draft drawn on Murchison & Co., of New York city, and payable there for $12,303.52. That this draft was endorsed by the drawers in the form in which, by agreement and custom between the parties, drafts for collection only were to be endorsed, and then mailed by the collecting bank to the plaintiff at New York on the same day that it was deposited. On the afternoon of March 31, the draft was presented by the plaintiff to the drawees, who gave the plaintiff their check for the same, which, on April 1, was collected through the clearinghouse, and the amount placed by the plaintiff on its books to the credit of the Exchange Bank in its account.
(2). That on April 2, 1885, the Exchange Bank, to which the draft had been delivered and credited as above stated, suspended payment in the morning, notice of which was not received by the plaintiff till the afternoon, and prior to the suspension at Norfolk no notice • had been received by that bank of the collection and credit of the proceeds of the draft by the plaintiff in New York; that this suspension was due to the fact that for more than six months-before the bank was utterly and hopelessly insolvent, to the knowledge of all its managing officers, and that this state of insolvency was produced by the misconduct of its managing officers in withdrawing large sums of money from the funds of the bank for their own purposes; that this condition of the Exchange Bank was not disclosed to, or within the knowledge of Everett Brothers, Gibson & Co. when the draft was deposited and credited, and that its receipt by the bank was a fraud upon the parties depositing it, which precluded the collecting bank from acquiring any title to it or its proceeds. The finding that by agreement the draft was received for collection only is supported by some, and that in regard to the fraud perpetrated on the drawers of the draft by abundant evidence. Indeed the latter fact is admitted by the receiver and assumed by his counsel in almost every step of the discussion. That the drawers of the draft had the right, under such circumstances, to reclaim it or the proceeds, upon discovery of the facts, from any one to whose hands it came who did not occupy the position of a Iona fide holder, is too clear to admit of controversy. Cragie et al. v. Hadley, 99 N. Y., 131; Anonymous Case, 67 id., 598. The argument in support of this appeal, as we understand it, denies the application of this rule to the peculiar facts and circumstances of this cáse, but not the rule itself. The proceeds of the draft in question were intermingled with a credit on plaintiff's books before the draft was collected and credited of §5,142.66, and that of thirty other drafts mailed at the same time from the Norfolk Bank to the plaintiff and collected and credited at the same time, substantially, and in the same way, by the plaintiff, together with some smaller items received at of about the same time, but subsequently collected and credited; the whole mass, including the draft, which is the subject of controversy in this suit, amounting to something over $26,000. This credit to the Norfolk Bank, however, was reduced to $5,349.45, the sum awarded to' the respondents, subsequent to the collection of the draft, in consequence of payments made by the plaintiff for, or upon the order of the Norfolk Bank and before notice of its suspension. As the Exchange Bank did not acquire any title to the draft, by reason of its fraud, it became the trustee of the drawers as to its proceeds, and as the identical money received upon its collection could not be reached, certain equitable rules are applicable to the facts of the case.
When money held by a person in a fiduciary capacity has been paid or deposited by him in his general account at a bank, the
party for whom the money is held can follow it and has a charge on the balance in the banker's hands; and if a person holding money in a fiduciary capacity pays it to his account at his banker's and mixes it with his own money and afterwards draws out sums by checks, generally and in the ordinary manner, the drawer of the checks must be taken to have drawn out his own in preference to the trust money. The rule attributing the first drawings out to the first payments in, does not apply to such a case. Knatchbull v. Hallett, L. R, 13 Ch. Div., 696; Baker v. N. Y. Nat. Exchange Bank, 100 N. Y., 31; National Bank v. Insurance Co., 104 U. S., 54.
In the course of administration of the assets of the bank by the receiver, the respondents presented and proved a claim as creditors, which included the draft in question and received a dividend thereon. The trial court has found that when they presented the claim and received the dividend they were in ignorance of the facts which constituted the fraud on the part of the bank. It is also found that a second dividend was ordered upon the claim, filed by the respondents, which embraced the draft as well as other claims resting wholly in contract. The respondents refused to receive this dividend, so far as it included the draft, and they allowed to the receiver, out of the second dividend under their claim, exclusive of the draft, the full amount they had received in the first dividend upon the claim involved in this action. This was a sufficient rescission of what had been done under a mistake as to the facts. They were not bound to return the identical money received. The equitable rule, requiring the party rescinding to restore what he has received, was satisfied1 when the receiver was permitted to retain an equivalent sum, which belonged to the respondents in any event as general creditors under another claim. Allerton v. Allerton, 50 N. Y., 670.
Much of the argument in support of the appeal is based upon the assumption that the sum awarded to the respondents represents in part the proceeds of drafts delivered by other parties to the Norfolk bank at the same time and under the same conditions and circumstances as the one in question. That the rights and equities of these parties to the fund are as strong as the equities of the respondents. The answer to this position is that the drawers and owners of the other drafts have not elected, as the respondents have, to pursue this peculiar form of remedy, but have elected to waive the fraud, if any was perpetrated, in receiving their drafts by the bank, and to confine their claim as simple contract creditors to the assets in the hands of the receiver. They are not parties to this action, asserting that any fraud was committed against their rights or that for that or any other reason their title to the drafts or their proceeds was not affected by the transaction with the bank. The receiver takes the position that the title to, all the drafts passed to the bank, and what remained of their pro-' ceeds to him, and does not claim in his answer, as the respondents do, that the bank committed any fraud upon them. Nor is there any finding or request in the record upon which this argument can be based. The counsel for the receiver claims that in any event an item of $417.06, the proceeds of one or more of the small drafts last mentioned, and which was allowed in the amount awarded to the respondents, but which had been restored or allowed by the receiver to the owner, was erroneously included in the judgment As to that point it is sufficient to say that the process of tracing the proceeds of the respondents' draft and computing the amount of the balance to which they were entitled, upon the equitable rules above stated, which were adopted by the trial court, involved the determination, in some sense, of a question of fact; and as there is no distinct finding or request to find as to this particular item, we cannot say that any error was committed in that regard.
On the whole, we think that the case was rightly decided below, and that the judgment should be affirmed, with costs.
All concur, except Andrews, J., not voting, and Earl, J., dissenting.