Case Name: Baldwin's Bank of Penn Yan, Respondent, v. Albert L. Smith et al., Appellants
Court: New York Court of Appeals
Jurisdiction: New York
Decision Date: 1915-05-25
Citations: 215 N.Y. 76
Docket Number: 
Parties: Baldwin’s Bank of Penn Yan, Respondent, v. Albert L. Smith et al., Appellants.
Judges: 
Reporter: New York Reports
Volume: 215
Pages: 76–98

Head Matter:
Baldwin’s Bank of Penn Yan, Respondent, v. Albert L. Smith et al., Appellants.
Banking—relation of bank and depositor — when one bank becomes agent of another to collect note payable at former bank and remit proceeds —failure of agent bank to remit for such note —makers of note not liable after default of bank where note was payable. - -
1. The relation of debtor and creditor, not of agent and principal, exists between a bank and its depositor. The money deposited becomes a part of the bank’s general funds and it impliedly contracts to pay its depositor’s checks, acceptances and notes payable at the bank to the amount of Ms credit. In discharging its implied obligation it pays its own money as a principal, not its depositor’s money as an agent. It is a mere drawee answerable to the depositor if it fails to fulfill its implied contract obligation to pay notes and checks drawn by the depositor.
2. Where a bank which was the holder of a promissory note sent it, before maturity, to the bank where it was made payable “for collection and remittance ” it constituted the latter bank its agent to collect the note and remit the proceeds.
3. Defendants made their promissory note payable at a bank and the plaintiff, another bank, became its holder in due course and sent it to the bank, where it was payable, “for collection and remittance.” On the day the note fell due one of the makers telephoned to the latter bank and inquired if the note was there, and, being informed that it was, instructed the bank to charge it to the makers’ account, and was told‘that that would he done. Seven days later the bank failed without having remitted for the note, but during all that time the makers had more than sufficient funds at the bank to pay it. Held, that the defendants are not liable; that as to them the note was paid; that the acceptance by the bank of the verbal order to pay it and charge it to the makers’ account amounted to an appropriation of then- funds for that purpose; and, even if it he assumed the note was not paid, that the failure to secure payment was due to the neglect of the plaintiff’s agent, and the loss resulting therefrom should fall on the one responsible for the fault and not on the makers. {Indig v. National City Bank of Brooklyn, 80 IT. Y. 100, distinguished.)
(Argued March 17, 1915;
decided May 25, 1915.)
Baldwin's Bank v. Smith, 155 App. Div. 881, reversed.
Appeal from a judgment of the Appellate Division of the Supreme Court in the fourth judicial department, entered January 27, 1913, affirming a judgment in favor of plaintiff entered upon a decision of the court at a Trial Term without a jury.
The nature of the action and the facts, so far as material, are stated in the opinion.
Leiuis JET. Watkins and E. W. Personius for appellants.
The plaintiff was negligent; its negligence resulted in its failure to receive the money on the note and in the defendants suffering damage in the amount thereof. (Shipsey v. Bowery Nat. Bank, 59 N. Y. 485; Smith v. Miller, 43 N. Y. 171.) The Watkins hank was the agent of the plaintiff hank to collect the note and remit the proceeds; it was negligent in doing this; such negligence was the negligence of the plaintiff. (Nat. Revere Bank v. Nat. Bank of Rep., 172 N. Y. 102; Nat. B. & D. Bank v. Hubbell, 117 N. Y. 384; Briggs v. Central Nat. Bank, 89 N. Y. 183; St. Nicholas Bank v. State Nat. Bank, 128 N. Y. 26.)
Spencer F. Lincoln for respondent.
The defendants, the makers of the note, have not performed their contract, and are, therefore, liable to the plaintiff. (Indig v. Nat. City Bank, 80 N. Y. 100; Caldwell v. Cassidy, 8 Cow. 271; Budweiser Brewing Co. v. Capparelli, 16 Misc. Rep. 502; Locklin v. Moore, 57 N. Y. 360; Hills v. Place, 48 N. Y. 520.) The Farmers and Merchants’ Bank was not the agent of the plaintiff, hut was the agent of the defendants. (Hills v. Place, 48 N. Y. 522; Indig v. Nat. City Bank, 80 N. Y. 106; Locklin v. Moore, 57 N. Y. 360.) The plaintiff was not negligent to such an extent as to relieve the defendants, the makers of the note, from liability thereon; but the defendants were negligent in the performance of their contract as makers. (Indig v. Nat. City Bank, 80 N. Y. 100.)

Opinion:
Miller, J.
This is an action on a promissory note made by the defendants on the 11th day of August, 1910, payable to the order of W. N. Wise four months after date at the Farmers & Merchants' Bank, Watkins, N. Y. The plaintiff became the holder of the note in due course and before maturity sent .it to the bank where it was made payable "for collection and remittance." On the 19th day of December, 1910, seven days after the maturity of the note, said hank suspended without having remitted for the note, although during all of that time defendants had more than sufficient funds to their credit with it to meet the note, and the bank had sufficient funds to pay it. On Monday, December 12th, the due date having fallen on Sunday, the 11th, one of the defendants called the president of the Watkins bank by phone and inquired if the note was there, and, being informed that it was, instructed the president to charge it to the defendants' account and was told that that would be done. The plaintiff made no inquiry or effort to ascertain the fate of the note until after the failure of the Watkins bank.
This is a case of first impression. The trial .court relied on Indig v. National City Bank of Brooklyn (80 N. Y. 100). But that case is plainly distinguishable. The defendant there received a note from the plaintiff for collection and sent it to the bank where it was payable, which received it the day it fell due and the next day sent a Bew York draft for the amount of the note, less exchange, to the defendant, who received it the following day. On the day the draft was forwarded to the defendant the sender closed its doors and the draft was not paid. The defendant was sought to be made liable for negligence in sending the note to the bank where it was made payable. But it was held that that did not constitute actionable negligence, for the reason that the same result might have ensued if the defendant had employed a sub-agent, who would have been justified in accepting the draft. Judge Batallo did say that the defendant did not constitute the bank to which it sent the note its agent to receive the proceeds. But his opinion received the concurrence of only two of the judges, and on that point has in effect been overruled by this court (National Revere Bank of Boston v. National Bank of the Republic of N. Y., 172 N. Y. 102), and is opposed to the weight of authority. (Smith v. President, etc., Essex County Bank, 22 Barb. 627; Ayrault v. Pacific Bank, 47 N. Y. 570; Bank of Washington v. Triplett, 1 Peters, 25; Ward v. Smith, 7 Wall. 447; Cheney v. Libby, 134 U. S. 68, 82.) Plainly by sending the note "for collection and remittance" the plaintiff in this case constituted the Watkins bank its agent to collect the note and remit the proceeds.
It is settled law that the failure to make demand at the time and place of payment agreed upon does not exonerate the debtor, whose readiness to pay at the specified time and place is merely equivalent to a tender. (Hills v. Place, 48 N. Y. 520; Locklin v. Moore, 57 N. Y. 360; and see cases cited in the opinions in those cases.) In that respect a note, which is an absolute promise to pay, is said to differ from a check, which is a mere order. But it is also the law of this state, although it was early debated, that the failure to present a check within a reasonable time does not exonerate the drawer, unless there has been a loss. (Little v. Phenix Bank, 2 Hill, 425; Carroll v. Sweet, 128 N. Y. 19.) The Negotiable Instruments Law (Cons. Laws, ch. 38, section 141) provides: " Where the instrument is made payable at a bank it is equivalent to an order to the bank to pay the same for the account of the principal debtor thereon," and this court in Ætna National Bank v. Fourth National Bank of N. Y. (46 N. Y. 82, 88) said per Allen, J.: "An acceptance, or promissory note thus payable [i. e., at a bank] is, if the party is in funds, that is, has the amount to his credit, equivalent to a check; and is in effect an order, or draft on the banker, in favor of the holder, for the amount of the note or acceptance." The reason for exonerating the drawer of a check in case of loss resulting from a failure to present it in a reasonable time is that the drawing of a check is virtually an appropriation, though not an assignment, pro tanto of the drawer's funds in the bank. (See Little v. Phenix Bank, supra, at page 428.) It is incumbent on the holder of the paper to secure payment, and loss resulting from his neglect should fall upon him, not on the drawer, who has no further duty to perform. I am unable to perceive why the same reason does not hold good in the case of a note payable at a bank where the maker has funds to meet it at maturity, especially since such a note is by statute made the equivalent of a check. To the extent that he has appropriated his credit, he is not called upon to look after it, but discharges his duty by keeping his account good. None of the cases in this jurisdiction holding that the maker of a note payable at a bank is not exonerated by the holder's failure to present it for payment involved the question of a loss resulting from such failure. I find nothing in any of them except the dictum in the Indig case tb the effect that the loss in such case falls on the maker.
The obligation, to present the note, if it existed, bears on the obligation to follow it up, when it is sent by mail to the payee bank "for collection." I shall not discuss the numerous cases in other jurisdictions holding that it is negligence per se to send a bill for collection to the drawee, or payee, bank. There may be, in that respect, a distinction between a note and a check or a bill of exchange and between liability of an agent to its principal and liability of the holder to the maker. of a note. At any rate, the Indig case has generally been regarded as having settled the law in this state the other way and in accordance with what is believed to be the custom. However, by sending the note to the Watkins bank the plaintiff created a situation likely to, and which in fact did, 'mislead the defendants and result in loss. Upon being informed that the note was there, they directed that it be charged to their account. That was unnecessary (Ætna National Bank v. Fourth National Bank of N. Y., supra, at page 88), but it indicated a lively interest in caring for their paper. Nothing more remained for them to do, as of course they could wait, as business men customarily do, for the return of the note with their canceled vouchers. The plaintiff's act thus led the defendants to suppose that their credit had been applied pro tanto to the payment of the note and lulled them into taking no further measures either to pay the note or to draw upon the credit thus appropriated.
However, it is unnecessary to decide whether the plaintiff owed the defendants the duty in the first instance to present the note or whether its failure to make any inquiry for a week after sending the note by mail to the payee bank for collection discharged the makers, loss having resulted. The foregoing are at least cogent reasons for holding that, in making the payee bank an agent to collect, the holder takes the risk of loss'resulting from the latter's negligence and assumes responsibility for its acts within the scope of its authority. That such an agency was created in this case is plain, even though, as was said in the Indig case, the mere sending of a note by mail to the bank where it is payable be in effect the same as presenting it over the bank's counter. The Watkins bank was the agent of the plaintiff to collect, but not of the defendants to pay. Although it has sometimes been said that by making a note payable at a bank where the maker keeps an account he constitutes the bank his agent to pay it, that statement will not bear analysis. The relation of debtor and creditor, not of agent and principal, exists between a bank and its depositor. (Ætna National Bank v. Fourth National Bank of N. Y., supra; Jordan v. National Shoe & Leather Bank of N. Y., 74 N. Y. 467; Straus v. Tradesmen's Nat. Bank, 122 N. Y. 379; Shipman v. Bank of the State of New York, 126 N. Y. 318; Cassidy v. Uhlmann, 170 N. Y. 505.) The money deposited becomes a part of the bank's general funds. The bank impliedly contracts to pay its depositor's checks, acceptances, notes payable at the bank, and the like, to the amount of his credit. (Citizens' National Bank of Davenport v. Importers & Traders' Bank of N. Y., 119 N. Y. 195.) But in discharging its implied obligation it pays its own money as a debtor, not its depositor's money as an agent. As has already been shown, a note payable at a bank, where the depositor has an account, is, in respect to being an order to pay, the precise equivalent of a check. Plainly then the bank bears no relation of trust or agency to its depositor in respect of paying either notes or checks. It is a mere drawee answerable to the drawer for a breach of its implied contract obligation to honor the draft. It necessarily follows that the transaction between the defendants and the Watkins bank amounted to payment or that the failure to secure payment was due solely to the negligence of the plaintiff's agent.
The plaintiff knew when it sent the note to its agent that if the makers were in funds it would be paid by charging it to their account. Thus the subsequent transaction is to be viewed as though it had occurred directly between the plaintiff and the defendants, the latter being depositors of the former. What would constitute payment between the immediate parties should equally constitute payment though an agent for one intervened. The case in brief is this: A bank, the holder of a note, or the agent of the holder to collect, has funds in its hands upon which the makers are entitled to draw; after the note is due it is directed to charge the note against that credit and says it will do so. All that is necessary to constitute payment is .the intention to make the application, which may be evidenced in a variety of ways, e. g., by bookkeeping entries, by canceling' the note and surrendering it to the makers, by the drawing of a check by the makers and its acceptance in payment by the bank. It must be borne in mind that the plaintiff selected an agent to collect knowing that in the usual course of business payment would be made by a mere transfer of credits. If the makers had actually gone to the bank and passed the necessary currency over its counter to pay the note with a direction thus to apply it, that would plainly have constituted payment. (Smith v. President, etc., Essex Co. Bank, supra.) If they had sent a check drawn on the bank to pay the note, the acceptance of it would have been per se an appropriation of the funds of the drawer, or to be accurate, of the funds subject to the drawer's order, to the payment of the note. (Pratt v. Foote, 9 N. Y. 463; Commercial Bank of Penn. v. Union Bank of N. Y., 11 N. Y. 203; Oddie v. National City Bank of New York, 45 N. Y. 735.) The verbal order with the statement of the president of the bank that it would be acted upon was the equivalent in legal effect of a written order and its acceptance. It is to be noted that in the second of the cases just cited the bank to which payment was made was an agent to collect. That mere bookkeeping entries, or even the cancellation and sur render of the paper, is but evidence of, and does not constitute, payment is established by the cases holding that, where payment is made by a draft or check which is not paid, the paper can be reclaimed and an action maintained upon it. (See Burkhalter v. Second National Bank of Erie, Pa., 42 N. Y. 538, and cases cited.) The converse must be true, that payment may be made without that particular evidence of it. A distinction must be noted between cases like the last cited, where the drawee bank, without being constituted an agent to collect, gives its check, which is subsequently dishonored, and cases like this in which the drawee bank is also an agent to collect. In considering the cases on the question of payment, it is essential to keep in mind the precise relation of the parties. The agency of the Watkins bank is the vital fact in this case. If it in fact accepted an appropriation of the makers' credit with it in payment of the note, that should constitute payment in view of the fact that the plaintiff in sending the note to it for collection must have expected that payment would be made in exactly that way. That risk at least is taken in appointing a bank, where a note is payable, agent to collect it. It is not important how the bank evidenced its acceptance of the makers' verbal order or whether it did anything to remit the proceeds to its principal.
There are many cases in which stress has been laid on the evidences of payment as, e. g., canceling the note, marking it paid, or charging it on the books to the maker, but none, in this jurisdiction at least, holding that such evidence is necessary to establish the fact of payment. The act and the evidence of it must not be confused. The act in this case was the acceptance of the makers' verbal order to charge the note to their account. Making the bookkeeping entries would merely have created evidence of that act. When that verbal order was accepted the makers' credit was irrevocably appropriated pro tanto to the payment of the note precisely as though a written order in the form of a check had been presented and accepted. It may be that something more than a mere state of mind on the part of the one to make the application is necessary to constitute payment and that the mental determination of the president of the Watkins bank, not accompanied by or resulting* in any act, would not have sufficed. However, the acceptance of the makers' verbal order to make the application was an act fully as effective as, e. g., the marking of the note paid as was done by the cashier in Nineteenth Ward Bank v. First National Bank of South Weymouth (184 Mass. 49), a case which in principle and in the reasoning of the court strongly supports the view that the transaction under consideration amounted to payment. Thereafter it was of no concern to the defendants what bookkeeping entries were made by the plaintiff's agent or whether it remitted the proceeds of the note.
If we lay refinements aside, the truth is that the actual default of the Watkins bank was in not remitting the proceeds of the note to its principal, a cogent reason for adhering to the view that the note was paid. It is not conclusive on the question of payment that the plaintiff might not have been entitled to assert that the assets in the hands of the assignee or receiver of the Watkins bank were impressed with a trust in its favor, because there might be a transfer of credits so as to constitute payment without actually setting aside a distinct fund which could be impressed with a trust. (See People v. Merchants & Mechanics' Bank of Troy, 78 N. Y. 269.) That point is not involved and need not be decided.
If, however, we assume that the note was not paid, the failure to secure payment was due to the neglect of the plaintiff's agent, and the loss resulting therefrom should fall on the one responsible for the fault.
For the foregoing reasons I advise that the judgments be reversed and, as the facts are undisputed and found, that the complaint be dismissed, with costs.