Chemical Nat. Bank v. Armstrong

50 F. 798, 7 Ohio F. Dec. 219, 1892 U.S. App. LEXIS 1781

• Court: U.S. Circuit Court for the District of Southern Ohio
• Decided: June 2, 1892
• Docket: No. 4,339
• Status: Published

Opinion

Sage, District Judge,

(after stating the facts as above.) Conceding that the transaction of the $300,000 loan was fraudulent as between E. L. Harper and the Fidelity Bank, and that he appropriated the entire proceeds to his individual use, the claim of the Chemical Bank, which dealt in good faith in the transaction, and was innocent of any knowledge or participation in the fraud, is not affected thereby. The negotiation of the loan was within the authority of Harper, as vice president ■of the Fidelity Bank, and, if he used that authority fraudulently for his own advantage, the bank that enabled him to commit the fraud must suffer the consequences, and not the bank that made the loan and advanced the money, under the representation and in the belief that it was conducting a lair, legitimate business transaction with the Fidelity Bank.

The only questions to be decided are—

(1) Upon what sum shall dividends be computed?

(2) Shall the Chemical Bank be charged with the $25,000 Wilshire-Lewis note, duo Juno 28, 1887, as if it had been collected?

(8) Shall interest be allowed the Chemical Bank upon the sum which may be found duo to it for dividends?

In Lewis v. U. S., 92 U. S. 618, 623, the principle of equity that a creditor holding collaterals is not bound to apply them before enforcing his direct remedies against the debtor is recognized as settled. The authorities in support of the principle as stated are numerous. So far as it relates to the collaterals yet remaining in the possession of the Chemical Bank, there is no difficulty about its application in this ease. The contention arises upon the question whether the sums that have been paid to and received by the Chemical Bank on account of collateral notes pledged to it to secure the loan shall be first credited, and dividends paid on the residue; or, on the other hand, dividends shall be paid upon the entire amount as if those payments had not been made, and then the payments applied. The statutory provisions bearing upon the questions arc sections 5235 and 5236, Rev. St. 1J. S. Section 5235 requires the comptroller, upon appointing a- receiver for an insolvent national banking association, to give newspaper notice for three consecutive months, “calling on all persons who may have claims against such association to present the same, and to make legal proof thereof.” Section 5236, so far as here material, requires the comptroller to make a ratable dividend of the moneys paid over to him by the receiver—

“On all sucli claims as may have been proved to his satisfaction, or adjudicated in a court of competent jurisdiction; and, as the proceeds of the assets of such association are paid over to him, shall make further dividends on all claims previously proved or adjudicated.”

The contention for tbe complainant is that the statute fixes one time, with reference to which all calculations of the amount duo to creditors are to he made as a basis for dividends, and that that time is the date of the suspension of the bank, at which counsel say the active trust in favor of creditors begins to run. The argument is that it will not do to take the maturity of the claim, for that throws interest out of view altogether, and that the time when the proof of the claim is tendered cannot be taken, for that would introduce variations because of difference in dates of interest, and would permit a creditor having a high rate of interest to get an advantage over others, by postponing his time of proof, and thus swelling the amount due him.

For a similar reason it is urged that the date when the claim is allowed or adjudged eannol be taken. The contention is that the statute necessarily contemplates an estimation of all claims at one and the same instant of time; and that reason, as well as convenience, dictates that time to be the date of the commencement of the trust; that is to say, the date óf the suspension of the bank. In support of this contention White v. Knox, 111 U. S. 784, 4 Sup. Ct. Rep. 686, is cited. That case is an authority for the proposition that all creditors are to be treated alike with reference to" the payment of interest. White had obtained judgment on the 23d of June, 1883, upon a claim which had remained due and unpaid from the date of the suspension of the bank and the appointment of the receiver, which was about the 20th of December, 1875. Between that date and the judgment, the comptroller had paid to other creditors dividends amounting in the aggregate to 65 per cent, upon their respective claims as of the date when the,bank failed. White’s judgment included interest to the date of its rendition, and he claimed a dividend on the amount thus obtained. The comptroller paid him a dividend upon the same basis as that adopted for dividends to the other creditors. The difference between that amount and the amount claimed by White as the basis for his dividend was $21,379.66. Suit was brought to compel the payment of dividends on that difference. The supreme court upheld that rule of distribution, Chief Justice Waite saying, in the course of his opinion, that, “if interest is added- on one claim after that date before the percentage of dividend is calculated, it should be upon all; otherwise, the distribution would be according to different rules, .and not ratable, as the law requires. ”

In none of the cases decided by the supreme court does it appear that any pa}rment on account of the indebtedness of the creditor was made from the proceeds of collaterals, or otherwise, after the suspension of the bank and before the proof of claim. There are two or three cases in Pennsylvania in which the doctrine claimed by counsel for complainant is approved, but the weight of authority is the other wajd In Lewis v. U. S., 92 U. S. 618; Oasex. Bank, 100 U. S. 446; and Eastern Townships Bank v. Vermont Nat. Bank, 22 Fed. Rep. 186, — the claim proven was for the entire amount of the principal of the indebtedness as it existed when proven and at the date of the failure of the bank, for nothing had been realized from collateral, and there had been no partial payments, and the question as to the time with reference to which the amount due should be adjusted related exclusively to the payment of interest. In this case a different state of-facts exists. After the suspension of the Fidelity Bank, and before the Chemical Bank made any proof of its claim, it realized $75,000 from the payment of collaterals, to wit, three of the Wilshire-Lewis notes, as follows: $25,000 on the 23d of July, 1887, $25,000 on the 24th August, 1887, and $25,000 on the 1st of October, 1887, the dates at which said notes respectively matured. • These payments were entered up on the books of the Chemical Bank at the dates of their receipt to the credit of the general collateral account of the Fidelity Bank. The Chemical Bank treated the collaterals received in March and May and June as all belonging to one and the same account, or, in the language of the cashier of that bank in his testimony, “as massed;” and so with the loans, the bank acting on the erroneous theory, already stated, that it had the right to apply the proceeds» of all the collaterals to the payment of all or any part of the indebtedness of the Fidelity Bank. The question then is how the payment of these amounts, before the filing of the claim of the Chemical Bank with the receiver, is to be regarded. Was the Chemical Bank bound to credit them on its claim, or did it have the right to prove and receive dividends upon the entire claim, holding the amounts received from the collaterals back, to be applied, after the receipt of the dividends, to the residue of the claim? It is urged that the entries of credit ought not to conclude the Chemical Bank, because they were made upon the theory that the loans and the collaterals were to be treated as belonging to one transaction. Conceding that the Chemical Bank is not concluded by the entries, how does the matter stand? The provision in section 5236 of the .Revised Statutes is for the payment by the comptroller of ratable dividends “on all such claims as may have been proved to his satisfaction, or adjudicated in a court of competent jurisdiction.” The first thing for a creditor to do, then, is to make proof of his claim, and there seems to me to he no escape from the conclusion that the claim must be proven as it exists when the proof is made. What, then, was the true amount of the claim when the proof was made by the Chemical Bank? It had received negotiable securities as collateral. It is stated at page 213 in Sehouler on Bailments that the rule doducihle from the decisions is that “the pledgee of negotiable securities not only has the right, hid is hound, in the exercise of ordinary diligence, to make presentment or collection on their maturity, and then apply the proceeds on the pledged account.”

In West v. Bank, 19 Vt. 403, Judge RiiDEfELD, on page 409, says: “It is true that if the security had been converted into money, and it is between debtor and creditor, it ceases to be collateral, and operates directly as payment, so that the debt is thereby reduced, and the creditor can only go for the balance.” • In Sohier v. Loring, 6 Cush. 587, the court held that any proof sought, to be made by a creditor after he has been paid any part of his claim can be only for the unpaid balance. Judge Lowell says in Be Souther, 2 Low. 320, that in bankruptcy no creditor can prove for more than his actual debt as it exists at the time of the proof, without obtaining an undue advantage over other creditors. It was held by the court of appeals of Maryland in Bank v. Lanahan, 7 Atl. Rep. 615, decided January 5, 1887, that a creditor who had realized on collaterals was entitled to a dividend, under an assignment for the benefit of creditors, for only the residue of his claim after deducting the amount realized on the collateral. The court said that it could not be denied that the sum received from the collaterals diminished the indebtedness, and that the creditor had thereby actually received payment to a certain extent. In Mason v. Bogg, 2 Mylne & C. 448, Lord Chancellor CottkxiiaM said that in equity a party might come in and prove without giving up or affecting his securities, except so far as the amount of his debt may bo diminished by what he may receive; and in Bollock's Case, 3 Ch. App. 7(»9, Sir William 1’agb Wood, in deciding the case, referred to the right of the creditor to stand upon his securities until they are redeemed; and in People v. E. Remington & Sons, 121 N. Y., at page 886, 24 N. E. Rep. 793, the court said that the creditor was entitled to prove against the estate for what was due to him, and receive a dividend upon that amount without deduction on account of collateral securities held by him. In Wheeler v. Newbould, 16 N. Y. 392, the court of appeals held that, where negotiable securities are pledged for a loan, “the primary, and, indeed, the only, purpose of the pledge is to put it in the power of the pledgee to reimburse himself for the money advanced when it becomes due and remains unpaid. The contract carries with it an implication that the security shall be made effectual to discharge the obligation.The court further held that it would be presumed, in the absence of express stipulations to the contrary, that it was the intention of the parties to the contract that the creditor should, if he resorted to the pledge instead of the personal liability of the debtor, accept the money upon the hypothecated securities, as it became due and payable, and apply it to the satisfaction of his debt. The.general law with reference to the appropriation of payments is that, if the party who pays money does not make a specific application at the time of the payment, the right of application devolves on the payee, and he must then exercise it, or the law will exercise it for him. It has been held-that, if money is paid to the pledgee before the maturity of the principal note, he has no right to apply the proceeds to the payment of that note until it matures, and that in such case the money when received is a substitute for the collateral note on account of which it was paid, and is to be held upon the same terms and subject to the same rights and duties as the collateral note. Garlick v. James, 12 Johns. 148. Butin this case the payments of the collateral notes were made after the maturity of the loan, and it was the duty of the Chemical Bank to apply them at once as credits upon its'claim, upon the loan against the Fidelity Bank. A general credit was entered, and it must stand as a credit against that loan. It results that when the Chemical Bank presented its claim there should have been credited upon it the amount realized from collaterals, and the claim for $300,000, the full amount, was rightly rejected.

The next question is whether the Chemical Bank shall be charged with the $25,000 Wilshire-Lewis note, due June 28, 1887, as if it had been collected. The facts relating to this branch of the case have airead}' been stated in a general way, but it is now necessary to refer to them more particularly. That note was among the collaterals originally pledged for the payment of the $300,000 loan. On the 19th of May, 1887, the Fidelity National Bank telegraphed the Chemical Bank: “We send other bills to take place. Will want all returned herewitbout presenting, as we advised parties to arrange payment here.” On the same day the Fidelity Bank by letter, over the signature of “E. L. Harper, Y. P.,” wrote the cashier of the Chemical Bank as follows:

“Please do not present any of tlie collateral paper for payment. We have advised parties we would order back and charge dp here. We will to-morrow send you new notes to take the place of ones maturing. We will pay the loan July 15th, and will pay interest till that date, if agreeable to you.”

The $25,000 note was not ordered back by the Fidelity Bank, but on the 21st of May, 1887, sundry other bills receivable, which would mature in May or Juno, and which were held as collateral, were called homo by the Fidelity and others substituted. On the 28th of June, 1887, seven days after the suspension of the Fidelity Bank, and one day after the appointment of Armstrong, as receiver, the $25,000 note matured. It was then held as collateral by the Chemical Bank. There was no presentment or demand for payment, nor any notice of nonpayment to Lewis, the indorser, who ivas abundantly able to pay, whereas Wilshire, the maker, was insolvent. The cashier of the Chemical Bank testifies in his deposition that the 28th of June came, and the note had not been returned to Cincinnati, and that night he discovered that fact, and wired Wilshire and Lewis at the place where he supposed they would be found, and where the note was payable^ namely, Cincinnati. He says that the loans were in the hands of the loan clerk, who did not call his attention to the $25,000 note, the note clerk acting on the presumption that the telegram and letter of May 19th were authority; but the cashier, happening that afternoon to have some time, got out the papers, and was looking them over, and, as he says, “was more than surprised to find this piece of paper on hand,” referring to the note, and at onco--.it was then about half past four — -“did his duty and notified (he parties.” He also testifies that he knew of the failure of the Fidelity Bank on the 21st of June, he thinks, or the 22d.

It is urged for the Chemical Bank that it had the right to assume that it was to do nothing with respect to presentment, demand, or notice of nonpayment of this note; that the instructions contained in the telegram and letter of May 19th continued in force until altered by positive directions. Also, that the evidence shows that the Fidelity Bank never was the owner of this note, and thgt it was an accommodation note for the uso of Harper, which the Chemical Bank, as an innoeeut purchaser for value before maturity, had the right to enforce: but, as far as Lewis was concerned, that right existed only in case the Chemical Bank could not otherwise collect its debt ás against him; that the lien of the Chemical Bank extended only so far as necessary for its own protection, and, if Lewis had paid the noto, he would have been subrogated to the rights of the Chemical Bank against the Fidelity, and the securities belonging to that hank, after the Chemical Bank had been paid the residue of its claim; also that Lewis was practically a surety for the Fidelity Bank, which was the principal debtor. The argument for the defendant is that it appears from the evidence that the money on the $800,000 loan ivas borrowed by E. L. Harper in the name of the bank, but for his oivn use, without any authority or knowledge of the other officers of the hank, and by the perpetration of a fraud on all the par-tios concerned; and that the proceeds of the loan wore immediately placed to Ids individual credit, and drawn out for his own use. Counsel say that if Harper had paid that debt, or any part of it, he could not prove the sum so paid as a cl aún against the Fidelity National Bank, and that the same rule applies to collections from collaterals furnished by him, whether belonging to or only controlled by him.

The argument is further that the complainant had knowledge or reason to suppose that the collaterals belonged to the Fidelity National Bank; that that would have been naturally and properly inferred by the complainant from the manner in which it obtained possession of them, and the manner in which they were sent to it, and therefore the complainant cannot complain if the same results should follow as would have followed had they actually belonged to the Fidelity Bank.

As to the claim that the Wilshire-Lewis notes were accommodation notes loaned to Harper, and that no consideration was received for them by Lewis and Wilshire, attention is called to the only testimony upon that part of the case, — the deposition of Wilshire, — and to the fact that Lewis, who paid three of the notes as indorser, has neither testified nor made any claim of the kind stated. Harper’s name does not appear upon those notes,-and, according to Wilshire, nothing was said about paying them or in any way taking care of them. The transaction occurred at Wil-shire’s house, in Cincinnati, on the night of February 25, 1887, Wil-shire, Harper, and Lewis being present, and all taking part in the conversation. Harper stated that he required additional funds to carry on a certain deal which he had on hand at that time, that he did not have the amount of ready money in possession, but that he could use paper, discounted either in his own bank or elsewhere, and Wilshire testifies that notes were made for that purpose, but nothing at all was said as to who was to take up the notes. Harper spoke of the condition of the market, the favorable outlook, and the necessity of having ample money to protect the deal; also, that while the deal was very promising, and the prospects for a successful termination favorable, yet with the opposition at Chicago it was best to be prepared to furnish additional margin when called for; that, although the money was not needed then, it possibly might be later on, and Harper wanted to be prepared for it. Why Lewis was interested in assisting Harper does not appear from Wilsbire’s deposition. Wilshire himself was Harper’s broker. The argument is that, the paper having been made to enable Harper to borrow money upon it, neither Wilshire nor Lewis can plead that it was accommodation paper as against the party who loaned the money on the faith of it; and that, while it is true that the Fidelitj^ Bank did not primarily Jend the money on that paper, it did loan its credit, and thus obtained the money and gave it to Harper, thereby accomplishing the object intended by Lewis and Wilshire, and therefore having the same right to protection on its credit as if it had primarily made the loan. I am satisfied that this is'the correct view of the transaction, and that, as to the three-$25,000 notes that wrere paid, inasmuch as Lewis and Wilshire knew that they were to be used to obtain money to aid Harper in a deal in which they were in some way sufficiently interested to furnish $100,000 of negotiable security, they would not be entitled to prove up any claim against the Fidelity Bank. This brings us back to the question whether the failure of the Chemical Bank to make demand of payment of the $25,000 note due June 28th was warranted by the telegram and-letter of May 19th. My conclusion is that it was not. Those advices were followed by the letter of May 21st, calling home certain of the securities which would maturo in May and June, but not the §25,000 note. The omission of that note from that call was of itself sufficient to indicate that it was not the intention to order it back to Cincinnati. It remained as collateral in the hands of the Chemical Bank until its maturity. The Fidelity suspended payment on the 21st of June, and that fact was known to the Chen rica! Bank on that day or the day following. Jt was dearly the duty of the Chemical Bank to observe the ordinary rules binding upon toe holder of negotiable securities as collateral, with reference to presentment for payment and notice of nonpayment. The failure to do so was a neglect which was called an “oversight,” and which, when it was discovered by the cashier, it was too late to remedy. The note should have been sent by the Chemical Bank to its correspondent at Cincinnati, where it was payable, in time for presentment and demand, and, in the event of nonpayment, of notice. This not having been done, the claim against the only solvent party to the note was lost, and the amount must be charged to the Chemical Bank as if the note had been paid.

With reference to interest, this court has the right to take judicial notice of the tact which appears in its own records, although it is not shown in evidence in this case, that no interest has been paid upon claims proven against the Fidelity Bank, excepting in eases whore claims rejected by the receiver were subsequently affirmed by the judgment of this or some other court of competent jurisdiction. In such cases interest has been allowed from the date when dividends were withheld that should have been paid. There is another consideration which cannot be overlooked. When the complainant proved its claim for the entire amount of the §300,000 loan, the receiver offered to pay the dividends on $200,-000, without prejudice to the right of the complainant to litigate its claim for the residue. The offer was rejected, with the result to lock up, pending the litigation, the amount which would have been paid in dividends on $200,000. Applying the maxim that he who seeks equity must do equity, the complainant will not now be allowed interest on the amount winch was offered to and rejected by it. The true amount on which dividends should bo allowed will be ascertained by adding to the principal of the loan interest thereon from the 2d of March, 1887, its date, to June 21, 1887, the date of the suspension of the Fidelity Bank, and then deducting the $75,000 realized from the three Wilshire-Lewis notes which were paid, and $25,000 on account of the $25,000 Wilshire-Lewis note that was not presented for payment nor protested. The claim of the complainant is subject to a further credit of $4,481.49, cash realized from the Whitely, Fassler & Kelley notes, and the notes of the Champion Machine Company, but that credit is not to affect the dividends, for the reason that it was realized subsequent to the proof of complainant’s claim. Interest will be allowed on the amount of the dividends on the excess of complainant’s claim over $200,000, to be reckoned from the date of the proof of the claim.