Case Name: The Hamilton Machine Tool Co. v. The Memphis National Bank
Court: Supreme Court of Ohio
Jurisdiction: Ohio
Decision Date: 1911-05-09
Citations: 84 Ohio St. 184
Docket Number: No. 12038
Parties: The Hamilton Machine Tool Co. v. The Memphis National Bank.
Judges: Davis, Si-iaucic, Johnson and Donahue, JJ., concur.
Reporter: Ohio State Reports, New Service
Volume: 84
Pages: 184–200

Head Matter:
The Hamilton Machine Tool Co. v. The Memphis National Bank.
Maker sends note to payee — With request to have discounted— And proceeds returned to maker — Bank discounts note — Payee overdrawn at bank — Bank appropriates amount of overdraft from principal of note — Bank sues maker of note — Maker’s defense, payee’s overdraft pre-existing debt — And, therefore, no consideration — Bank held to be bona tide purchaser.
On the 12th day of November, 1904, the H. M. T. Co., of Hamilton, Ohio, executed its note for the sum of $948.15, payable to the order of Y. & L., of Knoxville, Tennessee, in four months after date, and sent it by mail to Y. & L. requesting them to procure its discount and remit the proceeds to the maker of the note. On the 14th day of November, 1904, Y. & L., being indebted to the Memphis National Bank on overdraft in -the sum of $436.55, sent said note endorsed in blank to that bank with which they had an account, requesting it to discount it and place the proceeds to their account, all of which was done, the bank having no knowledge of the instructions by the maker to Y. & L., thus extinguishing the overdraft and leaving a credit balance of $491.85 in favor of Y. & L.
On the 17th day of November, 1904, Y. & L. drew their check against the credit balance for the sum of $500, which was honored by the bank, leaving their account overdrawn in the sum of $8.15, and shortly thereafter, the account was closed and Y. & L. ceased business with the bank. The note was not paid at maturity, and the bank brought suit thereon against the maker who claimed1 in partial defense, that the amount of said overdraft of $436.55 extinguished by the proceeds of the discounted note, should be deducted, because such overdraft was a pre-existing debt.
Held: That the bank, having no knowledge of the instructions sent by the maker to Y. & L., and believing the note belonged to them, purchased it in good faith before maturity, and it is entitled to recover on the same without deduction of the amount of such overdraft.
(No. 12038
Decided May 9, 1911.)
Error to the Circuit Court of Butler county.
The plaintiff in error was defendant in the court of common pleas in an action brought against it by the defendant in error, the Memphis National Bank, in which action the issues were joined by the petition, answer and reply.
The petition filed by the bank is the following:
“Plaintiff, says that it is a national bank duly organized with powers to sue and be sued in its corporate name by virtue of the laws and a certificate issued to it by the United States.
“Plaintiff says that on the 12th day of November, 1904, the defendant (The Hamilton Machine & Tool Co.)', made and executed a certain promissory note on that d'ate in the favor of Young & Lane for the sum of nine hundred and forty-eight dollars and fifteen cents ($948.15) due in four months after said date.
“A copy of said note made and delivered to Young & Lane reads as follows, together with all the indorsements thereon:
“$948.15. Hamilton, Ohio, Nov. 12th, 1904.
“Four months after date We promise to pay to the order of Young & Lane
“Nine hundred and forty-eight 15-100 — dollars, at Union Savings Bank & Trust Co. — -Cincinnati, Ohio.
Value received.
No......... Due........
“The Hamilton Machine Tool Co.
“Citas. F. Hilker, Prest.
“On the back of said note appears endorsement Young & Lane, Frank Lane.
“Notes protested for non-payment March 13, 1905.
“Plaintiff says that on or about November 17th, 1904, said Young & Lane for a valuable consideration transferred and delivered said note to said Memphis National Bank at said date which said bank then became owner and holder of said note for full value.
“And that said Memphis National' Bank from said time became the bona fide owner and holder of said note and are still the bona fide owner and holder of said note.
“And that said note became due and payable' and was then presented to the Union Savings & Trust Co. Bank of Cincinnati, Ohio, the same was then protested for non-payment of interest, Young & Lane had due notice.
“Wherefore, a right of action has now accrued to the plaintiff for the reasons hereinbefore stated, and that there is now due to it from the defendants (The Hamilton Machine & Tool Co.) the sum of $948.15 with interest thereon 6 per cent, from the 13th day of March, 1905, and that no payments have been made thereon, that entire amount is now due and unpaid.
“Wherefore plaintiff now asks judgment against defendants (The Hamilton Machine & - T ool Co.) for the sum of $948.15- together with 6 per cent, interest thereon from March 13th, 1905, and costs of suit and other relief.”
To this petition the defendant below filed the following answer:
“Now comes defendant, The Hamilton Machine Tool Company, a corporation under the laws of Ohio, and by way of answer to plaintiff’s petition herein, admits that it executed the note described in the petition herein, but denies that plaintiff paid any consideration for the said note.
“Further answering this defendant says that on or about the 14th day of October, 1904, it delivered said note to Frank Lane, doing business under the firm name of Young & Lane, at Knoxville, Tennessee, under an agreement with said Frank Lane, that he should procure the discount of said note and remit the net proceeds of same to this defendant, The Hamilton Machine Tool Company.
“This defendant further says that it is informed, and believes and so charges, as a fact that said Frank Lane sent said note to the bank of the plaintiff for discount; that at that time the said Frank Lane was indebted to the plaintiff in a sum greatly in excess of the amount named in said note, and when it discounted said note, instead of paying same to said Frank Lane, without the knowledge or consent of this defendant or of Frank Lane, it applied the net proceeds of said note to the reduction of the indebtedness of said Frank Lane, so that the said Frank Lane could not and in fact did not remit to this defendant the net proceeds of said note, as under his agreement with this defendant, he was bound to do.
“This defendant further avers that the action of plaintiff in using the proceeds of its note to the extinguishment or reduction of the debt due to it from Frank Lane, was without warrant of law and wholly unauthorized, and when this defendant learned of the action of the plaintiff it notified plaintiff that its action was unauthorized and il legal and demanded of plaintiff the return of said note, which plaintiff refused and still refuses to do.
' “Wherefore this defendant prays that plaintiff may be ordered to surrender said note to it; that the petition be dismissed and the defendant recover its costs herein expended, and for all other and proper relief.”
The following is the reply to the above answer:
“And now comes the plaintiff and for its reply to defendant’s answer says:
“The plaintiff says it paid a valuable consideration for said note, all of which it is ready and willing to make appear.
■ “The plaintiff says by way of further reply it has no knowledge or information as to any private agreement between Frank Lane and the defendant touching the proceeds of said note or the agreement on the part of Frank Lane to remit the same to the defendant at the time mentioned in said answer and therefore this plaintiff denies the same.
“The plaintiff for further reply says at the time said Frank Lane procured the discount of said note by the plaintiff at the time mentioned in the petition, about the......day of November, 1904, and long before said note became due and payable, the said plaintiff'paid the said Frank Lane or the firm of Young & Lane, the full value of said note in money and funds belonging to said plaintiff, save and except about two hundred dollars of an overdraft of the said Young & Lane or Frank Lane. All of which was at the time consented to by said Frank Lane and Young & Lane.
“There was paid at' the time about seven ($700.00) hundred dollars in money and perhaps about two hundred credited for the overdraft of Frank Lane and the firm of Young & Lane, all of which was agreed to at the time.
“This plaintiff denies that it had any knowledge of any private agreement between Frank Lane or Young & Lane at the time mentioned or is bound by the same in any way. This plaintiff denies all the other affirmative allegations in defendant’s answer and prays for judgment for the whole amount of said note and interest as it prayed for in the petition and other relief.”
On the issues thus made up, the cause by agreement was tried to the court, a jury being waived, and after hearing the evidence and arguments of counsel, the court found in favor of the bank for the amount of the note and interest, in the sum of $1,127.01, and judgment was rendered on the finding.
A motion for new trial was overruled, a bill of exceptions containing all the evidence, with a petition in error, was filed in the circuit court, where the judgment was affirmed. The case is here for review on a petition in error.
The facts are stated in the opinion.
Mr. Oscar W. Kuhn, for plaintiff in error.
The bank had no right to apply this $436.55 on the overdraft of Young & Lane for the reason that the money so applied was not the property of Young & Lane. Bank v. Brewing Co., 50 Ohio St., 151; 3 Am. & Eng. Ency. Law (2 ed.), 836; Bank v. Farwell, 58 Fed. Rep., 633.
It is submitted that even in such a case the bank has no right to apply any part of the proceeds of such a note to the payment of an indebtedness to it from the ostensible owner. 4 Am. & Eng. Ency. Law (2 ed.), 298; Bank v. Valentine, 18 Hun, 417; Bank v. Newell, 71 Wis., 309; Bank v. Huver, 114 Pa. St., 216; Dresser v. Construction Co., 93 U. S., 92.
Hence the bank becomes the trustee for the real owner of the fund who is allowed to recover it under the familiar rule in equity that a beneficiary of a fund may follow and reclaim his property so long as he can find it or its substantial equivalent if its form has been changed. Slater v. Mills, 18 R. I., 352; Commissioners v. Wilkinson, 119 Mich., 655; Bank v. Insurance Co., 104 U. S., 54; 28 Am. & Eng. Ency. Law (2 ed.), 1108.
And this proposition is true even though it has no notice that the deposit belonged to some one else than the depositor. Zane on Banks, Sec. 140; 2 Morse on Banking, Sec. 590; Boon on Banking, Sec. 285; Douglas v. Bank, 17 Minn., 35; Cady v. Bank, 46 Neb., 756; Armstrong v. Bank, 53 Ia., 752; Van Allen v. Bank, 52 N. Y., 1; Burtnett v. Bank, 38 Mich., 630; Davis v. Bank, 29 S. W. Rep., 926; Bank v. Harrison, 127 Ind., 128; Baker v. Bank, 100 N. Y., 31; Frazier v. Bank, 8 Watts & Serg., 18; Merrill v. Bank, 19 Pick., 32.
Mr. Stephen Crane and Mr. E. A. Belden, for defendant in error.
It is admitted by opposing counsel that the bank is entitled to recover the amount drawn out by Young & Lane after the note was’ discounted, namely, $491.85; but we claim that this court should affirm the decisions of the lower courts giving judgment for the full amount of the note against the plaintiff in error.
The action of the Memphis bank in accepting the note and placing the proceeds of the discount to the credit of Young & Lane, was a purchase of the instrument.
This paper may be regarded as accommodation paper and follows the law upon that subject. 4 Am. & Eng. Ency. Law (2 ed.), 285, 295, 296, 299.
This court will bear in mind the fact that not only was the overdraft of Young & Lane satisfied by the discount of this note, but Young & Lane were permitted to check against the proceeds of this discount of the paper. Bank v. Crawford, 2 C. S. C. R., 125; Kingsland, Hook & Co. v. Pryor, 33 Ohio St., 19.
In the case at bar there was Credit given upon the strength of the apparent ownership of the negotiable instrument, and the bank from the time this note was discounted had no right of action against Young & Lane upon their overdraft, that overdraft had ceased to exist, and the remedy of the bank was suspended until maturity of the note given by plaintiff in error and Young & Lane.
As to this making the bank a bona fide owner, we call attention of the court to the. following authorities: 2 Randolph on Commercial Paper, Secs. 461, 462; Holzworth et al. v. Koch, 26 Ohio St., 33; Clements v. Doerner, 40 Ohio St., 632.
The payment of money to a creditor, who received it in discharge of the existing debt, innocently and without knowledge or means of knowledge that the debtor paying has no rightful ownership of the fund, is good and effectual, and the true owner cannot recover the money of the recipient. Newhall v. Wyatt, 139 N. Y., 452, Nassau Bank v. Bank, 159 N. Y., 456; Stephens v. Board of Education, 79 N. Y., 183; 2 Pomeroy's Equity Jur. (3 ed.), Sec. 1048.
We submit the following propositions:
1. A promissory note, or other negotiable instrument received in payment of a pre-existing debt, is taken for a valid consideration. Carlisle v. Wishart, 11 Ohio, 172; Section 3171x, Revised Statutes; Swift v. Tyson, 16 Pet., 1.
2. The discount of a negotiable paper by a bank at the request of a customer and placing the proceeds to his credit, makes the bank a bona fide holder for value. Gordon v. Kearney, 17 Ohio, 572.
3. Where one of two persons must sustain a loss, he shall be the sufferer who placed the means of imposition in the hands of the wrong-doer. Between two innocent persons, he shall suffer who incautiously g'ave the means of obtaining the false credit. Gordon v. Kearney, supra, 576.
4. The extension of time constitutes a sufficient consideration for a note. Holzworth v. Koch, 26 Ohio St., 33.
5. An agreement to forbear suit until the maturity of the note will be presumed from the acceptance thereof. Holzworth v. Koch, supra.
6. A creditor who has accepted property in payment of a pre-existing debt has changed his condition. Clements v. Doerner, 40 Ohio St., 632.
7. Unless complicity in the fraud is proven, or knowledge of it at the time of taking the note, the paper in the hands of the creditor cannot be impeached. Kingsland et al. v. Pryor, 33 Ohio St., 19.

Opinion:
Price, J.
The facts disclosed at the trial are not in dispute, as counsel for defendant in error state in their brief and in oral argument, that the brief for plaintiff in error correctly states the facts, and we are therefore authorized to adopt such statement, rather than search the record and restate them in another form. We add other facts contained in the record. Counsel differ mainly as to the conclusions which should be drawn from all the facts.
On the 12th day of November, 1904, The Hamilton Machine Tool Co. sent to Young & Lane at Knoxville, Tennessee, a promissory note, made, payable to the order of.Young & Lane, in the sum of $948.15, in four months after its date with six per cent.' interest per annum, requesting them to procure its discount, and remit the proceeds, , of same to The Hamilton Machine Tool Co. .
This note, with another not involved, in this case, was enclosed in a letter of which the following .is a copy: - . . .
"11-12-04.
"Messrs. Young & Lane,
"Knoxville; Tenn.
"Gentlemen: — In accordance with Mr. Hilker's understanding with you yesterday, we herewith enclose our two notes as follows:
"Nov. 12th, payable Feb. 23rd, 1905 — $920.80.
"Nov. 12th, at 4 months — $948.15.
"These notes you are to discount and send us proceeds together with your check for the difference to take up our note due December 10th for $2,683.47."
The Hilker mentioned in the above letter was president of the tool company, plaintiff in error.
The note in this controversy was executed by The Hamilton Machine Tool Co., at Hamilton, Ohio, payable to the order of Young & Lane, and made payable at the Union Savings Bank & Trust Co., Cincinnati, Ohio. On the 14th day of November, 1904, Young & Lane sent this note, with the other, in a letter to the Memphis National Bank, at Memphis, Tennessee, requesting the bank to "place the proceeds of same to their credit on the books of the bank."
This is the letter referred to:
"Knoxville, Tennessee, Nov. 14, 1904.
"Memphis National Bank,
"Memphis, Tenn.
"Dear Sirs: — Our records show our line of discounts with you .reduced about $2,000 this month, and we will be accommodated by your placing the enclosed to our credit, namely, Hamilton Machine Tool Co. $948.15, due March 12.
"Yours truly,
"Young & Lane,
"Frank Lane."
On the back of said note appears the endorsement: "Young & Lane, Frank Lane."
The bank received this paper so endorsed, discounted it and placed the proceeds, amounting to $928.40 to the credit of Young & Lane, as requested by them.
On November 5, 1904, ten days before the bank received this note and discounted it, the account of Young & Lane was overdrawn to the. extent of $436.55, and it remained thus overdrawn up to the time the note was so received. When the note was discounted and its proceeds credited to the account this overdraft of $436.55, was charged off, leaving to the credit of Young & Lane the sum of $491.85. On the 17th day of November, a check for $500 was drawn by Young & Lane against this credit, which was honored by the bank and charged to the account, leaving it again overdrawn to the extent of $8.15.
No part of the proceeds of the note mentioned was ever received by the Hamilton Machine Tool Company.
The note was not paid at maturity, the bank brought suit upon it, and recovered, as appears in our first statement.
The following concession appears in the brief for plaintiff in error: "The plaintiff in error con cedes that it is liable for the $491.85, which Young & Lane withdrew from the bank on their check of November 17, 1904, but not for the $436.55 which the bank applied toward the satisfaction of Young & Lane's overdraft, and it is for the purpose of having the judgment in this case reduced by the amount of this $436.55 that this proceeding is brought here."
This concession means that the Memphis Bank was not at fault in recognizing as valid, the check of Young & Lane for $500, drawn November 17, 1904, and charging it against the proceeds of the note, the maker of the note discounted by the bank, admitting as it does, "that when the bank discounted the note, it was not aware of these facts." The facts referred to of which the bank was not aware, were that the note "was not the property of Young & Lane, but of The Hamilton Machine Tool Co., Young & Lane being simply the agents of The Llamilton Machine Tool Co. for the special purpose of procuring its discount and remitting the net proceeds ' of same to Hamilton Machine Tool Co."
. The foregoing confession is no more than the facts compel, and tends to an easy solution of the contention, that the bank was not justified in applying proceeds of the discount to extinguish the overdraft of $436.55.
We find that the note in question was payable to order of Young & Lane — negotiable in form and the bank purchased it from the payees in the usual course of business, who endorsed it in blank, thus vesting the legal title in the bank. Instead of paying the proceeds to Young & Lane over the counter, the bank, at their request placed the same to their credit. It appears that Young & Lane had discounted other paper at this bank, not only-on this occasion, but had been transacting business with it previously, so that a regular account current existed between it and Young & Lane when this purchase was made. It so happened that they owed the bank $436.55 as an'overdraft on their account, and all the proceeds were placed to their credit, and after extinguishing or satisfying such overdraft, the bank owed Young & Lane on the account $491.85, or, in other words, they had a credit balance of that amount.
As before stated, by the check of November 17th, for $500 drawn on and honored by this bank, they exhausted the credit balance, which left the account again overdrawn in the sum of $8.15.
It being conceded that the bank was 'justified in honoring this check, because it had no knowledge of the mere agency of Young & Lane, and no knowledge of any relations they sustained to The Hamilton Machine Tool Co., maker of the note, except that shown by the note 'itself, it must also be conceded, that the bank acted in good faith, for it appears in the evidence of its cashier, and not controverted, that Young & Lane, in the course of their dealings with the bank, on previous occasions had overdrawn their account, which they subsequently made good, as they did in the discounting of this note — ostensibly their own note — and the bank acted upon it as their note.
In respect to extinguishing the overdraft, it is urged, that while the bank was ignorant of the agency of Young & Lane for the maker of the note, it used the proceeds of the discount in satisfying a pre-existing debt, which they could not do with funds actually belonging to the principal— the maker of the note. Is this position sound? It is entirely clear, and we think it cannot be controverted, that in discounting the note for Young & Lane, the bank became its absolute owner and that too in good faith. It was sent from Hamilton, Ohio, to. Young & Lane, at Knoxville, Tennessee, that they might get it discounted. To get it discounted would, or might, necessitate its sale. They were entrusted with such use of the note as would bring about its discount, of course for the benefit of the maker, but of the latter it is conceded the bank had no knowledge, and there was nothing on the face of the note, or in the negotiation, to excite suspicion or put the bank on inquiry.
Therefore, Young & Lane were authorized to hold themselves out to anyone who would discount the paper, as its absolute owners, as thev were the payees named therein.
But it was urged in argument that, as to this overdraft, the bank would not be the loser, if the court should credit its amount on the judgment in this case, for the reason that it has recourse on Young & Lane for that overdraft. The facts are against this claim. E. B. McHenry, who was cashier of the Memphis bank, testified to his acquaintance with Young & Lane, especially Lane, and that "in May, I think it was the 24th or 25th of May, perhaps, 1904, the firm of-Young & Lane opened an account with the bank and did business there, was there for some time afterwards,, making deposits and having notes discounted, and checking on their account, just as an ordinary customer would do." He also states that this bank had previously discounted two or three notes made payable to Young & Lane by The Hamilton Machine Tool Co., and that they were made payable at the same bank in Cincinnati mentioned in note referred to in this case.
The rate of discount was six per cent., and he states that the bank paid full value less this discount.
Another important fact in the record, is that but little if any business was transacted with this bank by Young & Lane after the purchase of the note, and certainly none after the bank became aware that anything was wrong or irregular between them and their principal. This concern, Young & Lane, resided at Knoxville, Tennessee, and sent the note with letter to the bank with instructions quoted above. After this purchase, and in January, 1905 — after they had overdrawn their account by the check of November 17, 1904— business between them and the bank ceased. • It has not been pointed out by counsel, and we do not know, how the bank could open up its account with Young & Lane — restore the charge of $436.55 overdraft — and pursue them for that amount. It had been paid and so entered on its books and the account closed, so far as business was concerned. By application of part of the proceeds to extinguishing the overdraft, the bank necessarily changed its position from that of a creditor to that of a debtor for the credit balance. This was wiped out by check later, which admittedly was properly honored by the bank. . The bank had a claim for $8.15 overdraft and that was all. The former overdraft had been paid and defense of pajmient could have been sustained had the bank sued for it. It had no right of action against them.
We are convinced that the bank believed and had a right to believe the note belonged to Young & Lane, having purchased it before maturity and in good faith, and it should not suffer because the apparent owner's u.sed part of the proceeds to pay their debt to the bank. Neither fair play nor any maxim of equity requires such result.
The authorities relied on by counsel for the parties are collected in the briefs, and we have attempted to state the legal conclusion that should be drawn from undisputed facts, and we therefore affirm the judgment.
Judgment affirmed.
Davis, Si-iaucic, Johnson and Donahue, JJ., concur.