Court Opinion

ID: 3882077
Source: CourtListenerOpinion
Date Created: 2016-07-06 09:13:15.095604+00
Date Added: 2024-06-11T07:41:57.600661
License: Public Domain

I concur in reversing the Circuit decree in this case, as indicated in the opinion of Mr. Justice Stabler, but upon a different ground from that upon which he bases reversal. I do not agree with certain conclusions reached by him, as I shall indicate.
At the inception of the several transactions which make up the setting of this interesting and very important controversy, the Camden Bank was the owner of the Wooten draft. It forwarded that draft to the Columbia Bank forcollection. The relation of principal and agent was thus constituted; the Camden Bank, the principal; the Columbia Bank, its agent. *Page 326 
The Columbia Bank, the agent bank, then reforwarded the draft to the Hartsville Bank for collection locally. The Hartsville Bank then became the subagent of the Camden Bank, the principal bank.
At the outset we have, then, clearly before us the relations of the several banks.
To recapitulate the facts: It appears that on June 21, 1926, the Camden Bank, the principal bank (the payee and therefore the owner of the Wooten draft), forwarded to the Columbia Bank, the agent bank, for collection and credit, a draft drawn by F.M. Wooten upon J.R. Young  Co., of Hartsville, S.C. for $8,849.54. The Columbia Bank immediately reforwarded the draft to the Hartsville Bank for collection locally. The Hartsville Bank collected the draft, passed the proceeds of the collection to the credit of the Columbia Bank, and at some time on June 25th, after the Columbia Bank had closed its doors for the last time, notified that bank of the collection and credit. Thereafter, on the same day, the Columbia Bank notified the Camden Bank that the draft had been paid. At the close of business on June 24th, the Camden Bank had a deposit credit with the Columbia Bank of $4,459.80. On the 25th the credit balance was increased by the book entry of the proceeds of the draft, $8,849.54. On that day drafts of the Camden Bank to the amount of $5,500 were honored by the Columbia Bank. If the credit of $8,849.54 should be eliminated, the Camden Bank would be chargeable with an overdraft of the difference between $5,500 and $4,459.80, $1,040.20, except for the fact that a check of $4,000, which was charged up to the Camden Bank in the estimate of the credit balance above stated of $4,459.80, was never paid; this would make the deposit credit $4,000 more, or $8,459.80, diminished by the $5,500 drafts, leaving a net balance to the credit of the Camden Bank of $2,959.80, against which is to be charged a balance of $3,392.21 due by the Camden Bank to the Columbia Bank, a net balance to the credit of the Columbia Bank of $432.33. *Page 327 
(I admit that this statement is not reconcilable with the result stated by Mr. Earle, cashier.)
At the close of business on June 25th, the Columbia Bank had a deposit credit, including the proceeds of the $8,849.54 draft, with the Hartsville Bank, $11,694.31. After the appointment of a receiver for the Columbia Bank, this deposit credit was passed to the credit of the receiver, on the books of the Hartsville Bank, and later under a consent order, the actual funds to the above amount were withdrawn from the Hartsville Bank, and "were without prejudice to the rights of the parties hereto, placed in the custody of James E. Peurifoy, receiver, to be by him held in separate fund, pending the determination hereof" (Extract from transcript of record.)
The Camden Bank contends that, as the proceeds of the draft, collected by the Hartsville Bank, which under the circumstances was a subagent of the Camden Bank, did not pass out of the hands of the Hartsville Bank until after the appointment of a receiver for the Columbia Bank, the agent of the Camden Bank, the fund is sufficiently identified as the property of the Camden Bank for the purpose of impressing a trust upon it in its favor, in the hands of the receiver.
The receiver contends, as was held by the decree of his Honor Judge Dennis, that when the Hartsville Bank collected the drafts, passed the proceeds upon the books to the credit of the Columbia Bank, and so notified the latter bank, and when the Columbia Bank charged the Hartsville Bank therewith, passed the proceeds upon its books to the credit of the Camden Bank, and so notified the latter bank, the relation of principal and agent, upon which the alleged trust is based, came to an end; and that the relation of debtor and creditor, as between both the Hartsville Bank and the Camden Bank or the Hartsville Bank, and the Columbia Bank and the Camden Bank, was substituted for the pre-existing relation of principal and agent, which precluded the existence of a trust upon which the Camden Bank relies. *Page 328 
Mr. Justice Stabler, in his opinion, in effect sustains the contention of the receiver that the transactions referred to terminated the relation of principal and agent, but holds that as the transactions were equivalent in law to a deposit by the Camden Bank with the Columbia Bank, the deposit, on account of the known insolvency of the Columbia Bank at the time was a fraud upon the Camden Bank and constituted a trust ex maleficio which entitles the Camden Bank to be preferentially paid out of the assets of the receivership estate.
My opinion is that the proceeds of the draft, in the hands of the Hartsville Bank, a subagent of the Camden Bank, not having passed out of the hands of the subagent bank until after the appointment of a receiver, never lost their identity as the property of the Camden Bank and are recoverable by it as such.
It may not make any difference in this case whether this Court should determine that the Camden Bank is entitled to recover upon one theory or the other; but it is conceivable that, under certain circumstances, it might happen that a bank occupying the position of the Camden Bank, by reason of the dissipation of all the assets of an insolvent bank except the fund upon which a trust is claimed, would reap a barren victory in being remitted to the general assets.
I think that the case of Commercial Nat. Bank v. Armstrong,148 U.S. 50; 13 S.Ct., 533; 37 L.Ed., 363, is conclusive upon the point at issue. To avoid confusion I shall refer to the banks involved as the principal bank, the bank owning the drafts; the agent bank, the bank to which the draft was forwarded for collection; and the subagent bank, the bank to which the draft was reforwarded by the agent
bank for collection locally.
A Philadelphia bank, the principal bank, forwarded to an Ohio bank, the agent bank, certain drafts for collection, so indorsed. The agent bank reforwarded them to certain other banks, subagent banks, likewise for collection. The *Page 329 
agent bank failed, having in its hands, or in the hands of other banks, subagent banks, to which the drafts had been sent for collection, locally, the proceeds of the drafts sent to it by the principal bank for collection. After the appointment of a receiver the principal bank brought an action to recover such proceeds. The Court held:
1. That the relation between the bank as to uncollected
paper was that of principal and agent.
2. That the simple collection of a draft by a subagent bank did not constitute a commingling of these collections with the general funds of the agent bank, and did not operate to relieve such funds from the trust obligation created by the agency, or create any difficulty in specially tracing them.
3. That if the agent bank was indebted to its subagent bank at the time, and the collections by the subagent bank, when made, were entered on its books as a credit upon such indebtedness, they were thereby reduced to possession and passed into the general funds of the agent bank.
In the opinion by Justice Brewer it is said:
"As to such paper, the transaction may be described thus: The plaintiff handed it to the [agent bank]; the [agent bank] handed it to a subagent; the subagent collected it, and held the specific money in hand to be delivered to the [agent bank]; then the failure of the [agent bank] came, and the specific money was handed to its receiver. That money never became a part of the general funds of the [agent bank]; it was not applied by the subagent in reducing the indebtedness of the [agent bank] to it, but it was held as a sum collected, to be paid over to the [agent bank] or to whomsoever might be entitled to it. The [agent bank] received the paper as agent, and the indorsement `for collection' was notice that its possession was that of agent and not of owner. In Sweenyv. Easter, 1 Wall, 166, 173 [17 L.Ed., 681], in which there was an indorsement `for collection,' Mr. Justice Miller said: `The words "for collection" evidently had a meaning. That meaning was intended to limit the effect which would have *Page 330 
been given to the indorsement without them, and warned the party that, contrary to the purpose of a general or blank indorsement, this was not intended to transfer the ownership of the note or its proceeds.'"
The point does not arise in the case at bar whether, if the Columbia Bank had at the time been indebted to the Hartsville Bank, the latter would have had the right to apply the proceeds of the draft to such indebtedness. The Armstrongcase holds that it would. It seems to me that the portion of the opinion just quoted renders that conclusion more than doubtful.
Again the Court says:
"If, before the subagent parts with the money or credits it upon an indebtedness of the agent bank to it, the insolvency of the latter is disclosed, it ought not to place the funds which it has collected, and which it knows belong to a third party, in the hands of that insolvent agent or its assignee; and, on the other hand, such insolvent agent has no equity in claiming that this money, which it has not yet received, and which belongs to its principal, should be transferred to and mixed with its general funds in the hands of its assignee, for the benefit of its general creditors, and to the exclusion of the principal for whom it was collected. Whether it be said that such funds are specifically traceable in the possession of the subagent or that the agent has never reduced those funds to possession, or put itself in a position where it could rightfully claim that it has changed the relation of agent to that of debtor, the result is the same. The Fidelity received this paper as agent. At the time of its insolvency, when its right to continue in business ceased, it had not fully performed its duties as agent and collector; it had not received the moneys collected by its subagent. They were traceable as separate and specific funds, and, therefore, the plaintiff was entitled to have them paid out of the assets in the hands of the receiver, for when he collected them from these subagents he was in fact collecting them as the agent *Page 331 
of the principal. No mere bookkeeping between the Fidelity and its subagent could change the actual status of the parties or destroy rights which arise out of the real facts of the transaction."
The case of Armstrong v. National Bank of Boyertown,90 Ky., 431; 14 S.W. 411; 9 L.R.A., 553, is strongly in point. There a bank which had become the owner of a draft and may be denominated the principal bank, forwarded it to another bank for collection, the agent bank; the latter reforwarded it to another bank at the home of the drawee, thesubagent bank, for collection locally. The subagent bank made the collection, passed the proceeds to the credit of the agent bank, and notified it of the collection and credit. The agent bank entered upon its books a charge against the subagent bank and a credit in favor of the principal bank, and so notified it. Upon the failure of the agent bank before the money was actually transmitted by the subagent bank, the principal bank brought suit against the subagent bank for the proceeds of the draft. By interpleader the receiver of the agent bank was substituted for the subagent bank. The Court held that the principal bank was entitled to the money. In the course of the opinion it was said:
"It has, however, been distinctly, and we think correctly, held that a holder of paper, who delivers it to a bank for collection and credit, is at liberty to treat the bank as an agent until the proceeds are collected by the bank in money, and that authority of the bank to credit the customer does not arise until he has actually received the money" (citing Leviv. Nat. Bank of Missouri, Fed. Cas. No. 8,289, 5 Dill., 104;Marine Bank v. Fulton County Bank, 69 U.S. (2 Wall.), 256; 17 L.Ed., 785; Morse, Banks, § 508; I Dan. Neg. Inst. § 334).
The Court further said:
"We therefore think collection of the draft by the Louisville Banking Company, and entry of the amount to the credit of the Fidelity Bank, did not have the effect of investing *Page 332 
the latter, nor changing its relation to appellee; for a mere usage between banks, whereby the collecting bank credits the transmitting bank with the amount collected, instead of remitting, is not alone sufficient to be set up against the real owner of notes or bills to deprive him of his rights" (citing Morse, Banks, § 565; First Nat. Bank of Clarion v. Gregg,79 Pa., 384).
In 2 Michie, Banks, 1439, it is said:
"Where a bank sends commercial paper to another bank for collection and credit on general account, the custom between them being to enter the credit only when the paper is collected, the relation between the banks is that of principal and agent until the collection is made and the money received by the second bank; and if the latter sends it to another bank, which collects the paper, but does not remit the proceeds until after the agent bank has failed, the principal can recover the proceeds from the receiver thereof."
In 7 C.J., 625, it is said:
"As a rule, if the bank at the end of the series has collected the proceeds of paper, but before sending or remitting the first bank has failed, the depositor or principal can collect the proceeds from the receiver if these have come into his possession."
At page 626:
"That the correspondent has credited the account of the remitting bank with the proceeds of the collection does not preclude the owner from recovering such proceeds of the correspondent upon the insolvency of the remitting bank."
In Branch v. United States Nat. Bank, 50 Neb. 470;70 N.W., 34, it is said in a case quite similar to that at bar:
"No mere bookkeeping between a bank [agent bank] and the subagent for the collection of money can change the actual status of the parties, or destroy rights which arise out of the real facts of the transaction."
There, as here, it was contended that the fact that the subagent bank had credited to the agent bank the proceeds of *Page 333 
collection changed the relation of the banks from principal and agent to debtor and creditor.
"Where a bank receives a draft with directions to collect, and notify the owner, and its correspondent collects the fund, the mere crediting to the principal bank by the correspondent, upon its own books, of the proceeds, the principal bank not being at the time indebted to the correspondent, does not change the relation of the principal bank to the owner from that of agent to that of debtor. Hence, the bank having failed, and the fund having been paid by the correspondent to the receiver, the owner might follow the fund." (In this quotation the "principal bank" means the "agent bank.") Guignon v. First Nat. Bank,22 Mont., 140; 55 P., 1051.
The principal of trust ex maleficio by reason of the receipt of deposits by a bank when in an insolvent condition, I do not think applicable, for the reason that, as I construe the circumstances, there never has been a deposit of the proceeds of collection with the Columbia Bank.
I think that the Circuit decree should be reversed and the case remanded to that Court, with direction to allow the Camden Bank a preferential judgment against the receiver for the amount of the proceeds of collection of the draft in question, less what may be ascertained by a reference to have been the net balance upon transactions other than that of said draft due by the Camden Bank to the Bank of Columbia.
MR. JUSTICE CARTER concurs.