COMMERCIAL BANK OF CLYDE against THE MARINE BANK

COMMERCIAL BANK OF CLYDE against THE MARINE BANK. Court of Appeals ; January Term, 1867. Banking.—Paper for Collection.—Purchaser for Value. A bank receiving negotiable paper from another banker for collection, obtains no better title thereto, or to its proceeds, than the remitting bank had, unless the collecting bank becomes a purchaser for value, without notice of any defect of title. Although it be shown to have been the usage of the parties to receive and collect drafts and notes, and to credit each to the other the proceeds when collected, and make settlements from time to time, the mere fací that the collecting bank delayed drawing the amount- due it from the remitting bank, by reason of its having possession of the draft for collection, does not entitle the collecting bank to hold the draft as against the true owner. Appeal from a judgment. The plaintiffs were owners of a draft payable in Milwaukee, which they indorsed, and sent through Lee & Co., bankers, of Buffalo, for collection. Lee & Co. indorsed it, and sent it to the defendants, a Milwaukee bank, who were their correspondents, and between whom and them commercial paper was constantly remitted and received for collection. On the failure of Lee & Co., the defendants claimed to hold the proceeds of this draft, for payment of balances due them on their account with Lee & Co. The court below sustained the defendants, and the plaintiffs appealed from the judgment against them. A. P. Laning, for the plaintiffs, appellants. I. The taking of commercial paper as collateral security for a jDrecedent debt, does not entitle the holder to retain it as against the true owner. To acquire a better title than that of the person from whom he received it, the holder must part with a valuable consideration; and receiving such paper in payment of, or as security for, an antecedent debt, is not such a consideration (Coddington v. Bay, 20 Johns., 637; Rosa v. Brotherson, 10 Wend., 86; Stalker v. McDonald, 6 Hill, 93 ; Youngs v. Lee, 12 N. Y. [2 Kern.], 551). II. The defendant having received the draft for collection, obtained no better title to it or its proceeds than Lee & Co., from whom it was received, possessed, unless it was a purchase for value, without notice of any defect of title. (1.) The fact that the defendants had a balance against Lee & Go., which it refrained from drawing, on account of holding this paper, does not make them purchasers for value. (2.) Nor does the course of dealing proved to have existed between Lee & Co.- and the defendants, by which each was accustomed to treat the paper of the other received for collection as belonging to the sender, constitute the defendants such purchasers (Scott v. Ocean Bank, 23 N. Y., 289 ; McBride v. Farmers’ Bank of Salem, 26 Id., 450). III. It is proved, and not denied that, at the time of the reception of the Crocker draft, Lee & Co. were indebted to the defendant in the sum of $410.45 (which would exceed the amount of the draft, the usual charges for collection having been deducted), and subsequent thereto, the defendants collected on account of Lee & Co. $310, exclusive of the draft in suit; and that the defendants afterwards forwarded to Lee & Co. the sum of §263.25. Nothing, therefore, was advanced on the faith of the draft; and no new credit was given. IV. In any event, it was a question for the jury whether there was any implied agreement between the defendants and Lee & Co., that the former should retain the draft in suit, or its proceeds, as security for their debt; and the court erred in refusing to submit such question, and in directing a verdict. V. The defendants knew that the draft in question was not the property of Lee & Co., or at least that it was not sent to them for credit, but for collection merely. And it is undisputed that, according to the course of dealing between the defendants and Lee & Co., credit was allowed only for the proceeds of paper. There was nothing to show that the title to this draft ever passed to the defendant, or that it was so understood to pass, from the course of business. The judgment of the supreme court should be reversed, and a new trial granted. Benjamin H. Austin, Jr., for the defendants, respondents. I. The facts proved show beyond question that the respondents were bona fide holders of the draft in question, and of its proceeds after payment. (1.) The defendants had a right to the belief that Lee & Co. were the owners of the draft. Encouraged by this belief, he gave them credit, sent them paper for collection, and permitted them to collect an amount exceeding the face of the draft. (2.) The sum of $200, which the defendants received from other collections, subsequent to the receipt of the Crocker draft, and prior to its payment, was, by the course of dealing existing between the defendants and Lee & Co., credited, on payment, and then applied against the balance standing in their favor when the Crocker draft was received (Allen v. Culver, 3 Den., 284). II. (1.) At the time of the failure of Lee & Co. (May 14, 1857), the advances above referred to constituted the defendants the owners of the Crocker draft. They therefore omitted to take measures to secure or collect any balance from Lee & Co. The Crocker draft was collected June 3, and its proceeds passed to the credit of Lee & Co. ¡Nothing was heard from the plaintiffs of their claim, until June 9. (2.) The payment of an antecedent debt is held to be a valuable consideration (1 Pars. on Bills, 221; Youngs v. Lee, 12 N. Y. [2 Kern.] 551; White v. Springfield Bank, 3 Sandf., 222; Bank of Sandusky v. Scoville, 24 Wend., 115 ; Iron Works v. Smith, 4 Duer, 362). (3.) It is immaterial at what time the defendant claims to have done acts equivalent to a purchase of the draft, so long as they were done before they had notice of the plaintiffs’ rights (White v. Springfield Bank, 3 Sandf., 222). (4.) The defendants became, by the act of giving Lee & Co. credit for the proceeds of the draft, if not before, the bona fide holders of the draft or its proceeds. It thereby paid and extinguished the antecedent debt of Lee & Co. against the draft. And giving credit on the books of the bank was sufficient for that purpose (Bank of Sandusky v. Scovill, 24 Wend., 115). (5.) The defendant was in no respect the agent of the plaintiff in the collection of the draft in question (Montgomery County Bank v. Albany City Bank, 7 N. Y. [3 Seld.], 459). (6.) The court properly directed a verdict. A different verdict would have been set aside as against evidence (Nichols v. Goldsmith, 7 Wend., 160 ; Goodrich v. Walker, 1 Johns. Cas., 251; 2 Salk., 244; Graham on New Trials, 301, 310). III. (1.) Even if the amount collected on the Crocker draft had been actually paid over by the defendants to Lee & Co., and the same paid back to the defendants in satisfaction pro tanto, yet the defendants, having no notice of the plaintiffs’ rights, could have holden it beyond question {Story on Agency, § 419). (2.) By the agreement and usage between the defendants and Lee & Co., the crediting of the proceeds of the Crocker draft, as above stated, amounted to such a payment, and the defendant was right in so regarding it. IV. This action might have been Med by the laws of Wisconsin (Hyde v. Goodnow, 3 N. Y. [3 Comst.], 267). Under those laws the judgment should be affirmed. To similar effect, Hoffman v. Miller, 9 Bosw., 334. [MAJORITY — Parker, J.] Parker, J. The plaintiffs are a corporation doing business at Clyde, in this State, and the defendants are also a corporation doing business at Milwaukee, Wisconsin. In April, 1857, Miller, Powell & Co. drew a draft on one Crocker, of Milwaukee, for $411.98, payable at sixty days, to the order of the plaintiffs, and delivered it for value to the plaintiffs. The plaintiffs indorsed and sent said draft to John R. Lee & Co., who were bankers at Buffalo, for collection, and on the 11th of April, Lee & Co. indorsed and sent it to the defendants for collection. On the 14th of May, 1857, Lee & Co. failed, and have ever since been insolvent. The defendants and Lee & Co. had each been, from about the 1st of April, 1858, to the 14th of May, 1857, the commercial and banking correspondents and agents of the other, and during that time had done business, each for the other, in the collection of drafts and commercial paper, and otherwise. It was their usage and custom to receive and collect drafts and notes, and to credit, each to the other, the proceeds of such drafts and notes when collected, deducting therefrom the charges and expenses of collection. Accounts current were exchanged from .time to time between them, and settlements made in accordance with such custom and usage. The draft in question was received by the defendants bn the 13th, and accepted by Crocker on the 14th of April, 1857. Between the 14th of April and the 14th of May the defendants, in the usual course of business, sent to Lee & Co., for collection, a certificate of deposit, issued by the International Bank of Buffalo, for $200, and a check drawn on said bank for $63.25, both of which were collected by Lee & Co., and placed to the credit of defendants ; and they also collected between those dates a draft, which had in like manner been previously sent them for collection, for $175, which was also placed to the defendants’ credit. And between those dates the. defendants had collected and placed to the credit of Lee & Co. paper forwarded by them, in the usual course of business, for collection, to the amount of $200. On June 3, 1857, the defendant collected the said Crocker draft of the drawer, and credited the amount of such collection, less one per cent, charges (being $407.85), to Lee & Co. On the day before the payment of the draft, Lee & Co. were indebted to the defendants in the sum of $743.70, leaving a balance, after deducting the proceeds of the draft, of $65.85. On June 9, defendants collected a draft—which they had received from Lee & Co. for collection, as usual — the net proceeds of which, amounting to $67.27, after paying a portion thereof which was claimed by a third party, were placed to the credit of Lee & Co. On this latter day the plaintiffs' gave defendants notice of their claim to, and demanded payment of, the proceeds of the Crocker draft, and defendants refused to pay the proceeds or any part thereof, to the plaintiffs. Evidence was given tending to show that, after the middle of March, the defendants did not intend to allow much balance in the hands of Lee & Co., beyond what paper defendants had from them about to mature, though, both before and after April 14, paper was sent to them in order to supply a fund on which defendants might draw for such small amounts as were occasionally called from Buffalo; also that paper was sent and the prior balance allowed to remain, after April 14, on the faith of the Crocker draft (which defendants believed to belong to Lee & Co.) and the other paper, and for the other reason above stated. Upon the trial the plaintiff asked the court to charge the jury that, unless the defendants gave Lee & Co. some new credit, or made advances, or parted with some value on the credit of the Crocker draft, the plaintiffs were entitled to recover, which was refused. And the jury were instructed, that if the defendant had transmitted any paper to Lee & Co. between April 14 and May 14, on the faith of the Crocker draft, or if they delayed the amount due them, by reason of having this draft, the plaintiffs were not entitled to recover ; and that upon the evidence the defendants were entitled to a verdict: and thereupon the court directed a verdict for the defendants. Without reference to the question whether this judgment could stand, upon the decisions of the supreme court of the United States, it is clear that it is not supported by the decisions of the courts of this State. It may be remarked that it is not so certain that the defendants transmitted any paper to Lee & Co. for collection, on the credit of the draft in question, as to authorize, the court to assume it as a fact against the consent of the plaintiffs. But there is ho pretense that paper to the whole amount of the proceeds of the draft was so sent; and even if the fact were admitted that the paper claimed to have been so sent was sent upon the credit of the draft, and if, as matter of law, it be admitted that defendants had the right to retain, from the proceeds, an amount equal to the amount of paper so sent and collected, still the plaintiff's were entitled to recover the difference between the amount of the proceeds of the draft and the amount of paper so sent and collected. Under the decisions of this court, the defendants could not hold any portion of such proceeds so satisfy balances which they had suffered to lie in the hands of Lee & Co. on the credit of the draft. This was very distinctly held in McBride v. Farmers’ Bank (26 N. Y., 450). The doctrine of that case is, that a bank .receiving from, another notes for collection, obtains no better title to them, or their proceeds, than the remitting bank had, unless it becomes a purchaser for value without notice of any defect of title; and that it is not a purchaser for value, by reason of its having a balance against the remitting bank for which it had refrained from drawing, in reliance upon a course of dealings be-. tween the banks to collect notes for each other, each keeping an open account of such collection, treating all the paper sent for collection as the property of the other, and drawing upon the proceeds for balances at pleasure. It is to be observed that the course of dealings between Lee & Co. and the defendants did not authorize either to draw upon the other for the amounts of the paper sent, until collected ; the proceeds, after deducting the charges for collection, were alone credited, and no notes or drafts ever entered into their accounts until collected. There is, then, no ground for saying that the draft in question ever belonged to the defendants. It was said in McBride v. Farmers’ Bank, “ According to "the decisions of the courts of this State, Paul & Pritchard could have set up any ..defense to their notes in the hands of the defendants, that existed in their favor as against the Canal Bank, or the Farmers’ and Mechanics’ Bank ; and the defendants had no title to the notes that enables them to retain the money they received thereon as against the true owner.” Precisely so in this case. Crocker could have set up any defense to the draft in the hands of defendants that existed in his favor as against Lee & Co. or the plaintiffs, so that the defendants had no title to the draft that enables them to retain the money they received thereon against the true- owner. Even as between the defendant and Lee & Co., no title to the draft ever passed to the defendants. If it had not "been paid, and had gone to protest, there is nothing in the case which would have entitled the defendants to maintain an action upon it against Lee & Co. If the defendants had been at liberty, in pursuance of the general arrangement between them and Lee & Co., to credit the draft on receiving it, and had done so, to form a fund upon which Lee & Co. were entitled to draw im- % mediately, as was the case in Clark v. Merchants’ Bank (2 N. Y. [2 Comst.], 380), then the defendants might, as against Lee & Co., have claimed ownership of the draft and of its proceeds. In that case this distinction is made the criterion. The court says : “The material question, as stated by the court below, is whether the bill in ques- v tion was transmitted [by the plaintiffs who were the owners] to Smith & Co. [their business correspondents] for collection, merely, or was to be credited to the plaintiffs, when received by the former, whether collected or not.” The court below hal held that it was not, by the course of dealings between the parties, to be credited until collected, while this court held that the proper inference from the facts proved was, that it was to be credited when received. “ The error of the learned judge, I apprehend,” says Judge G-arduster, “consists in the assumption that nothing was credited to Clark & Co. [the plaintiffs], in the course of business, until collected. This inference is opposed to the testimony of the only witnesses who speak as to the nature of the business, and mode of transacting it, and to instructions of the plaintiffs in the letter of the 15th of May.” And it was because of that error that the judgment of the court below, which gave the proceeds of the bill to the plaintiff, was held erroneous, and reversed. The case of Scott v. Ocean Bank (23 N. Y., 289), is based upon the same distinction. These cases, I think, warrant the conclusion that the defendants, having acquire d no title to the draft itself, cannot claim to hold, as against the true owner, any portion of the proceeds. In regard to the case at bar, however, it is sufficient, and all that I am authorized by the court to say is, that the court below erred in assuming that defendant had transmitted any paper to Lee & Co., on the credit of the draft, and in holding that if defendants had delayed drawing the amount due them by reason of having this draft, the plaintiffs were not entitled to recover. The judgment of the supreme court must therefore be reversed, and a new trial ordered. All the judges concurred in the result. Judgment reversed.