Dilworth v. Federal Reserve Bank

150 So. 821, 170 Miss. 373, 1933 Miss. LEXIS 16

• Court: Mississippi Supreme Court
• Decided: October 30, 1933
• Docket: No. 30731.
• Status: Published

Opinions

The Federal Reserve Bank of St. Louis, Mo., filed a suit against the appellant here, B.C. Dilworth, in the circuit court of Alcorn county, on a note dated October 30, 1931, due ninety days after date, payable to the First National Bank of Corinth, Miss., and bearing eight per cent. interest from date until paid, and agreement that, if not paid, any money on deposit to the credit of B.C. Dilworth on the books of the First National Bank of Corinth, Miss., should be applied, at once, on the payment of this note, with the usual stipulations as to attorney's fees, etc. After alleging the execution of the note, the appellee alleged that, before its maturity, the First National Bank of Corinth indorsed said note to the order of the Federal Reserve Bank of St. Louis for valuable consideration, in the ordinary course of business, which latter bank then became, and still is, the holder of said note.

The suit was filed on March 10, 1932, and on July 12 the appellant filed a motion to transfer the cause to the chancery court of the county of Alcorn, Miss., alleging, among other things, that, by the terms of the note itself, it was agreed that, if not paid at maturity, any and all money on deposit to his credit might be applied as a credit on or to the payment of said note; and that, when said note was transferred by the First National Bank of Corinth to the Federal Reserve Bank of St. Louis, he (Dilworth) had substantial credit in the First National Bank of Corinth, which was known to the appellee; that the note sued on in this cause does not belong to the appellee, but is held by it as collateral to an indebtedness of the First National Bank of Corinth to the appellee, and that, at best, appellee is only the pledgee of said note. It was further alleged that, when appellee took the note as security for said indebtedness, it made a thorough and detailed investigation, and knew that appellant had a substantial amount on deposit which could be, if the First National Bank of Corinth should fail, offset against the said note; and, with this information and knowledge, the appellee took the note as collateral security and was not without notice of such a defense. It was alleged that the collateral held by the Federal Reserve Bank of St. Louis for the indebtedness of the First National Bank of Corinth was two or three times the amount of its debt; that among the collateral held by appellee there were numerous county and municipal bonds, which appellee was under duty, when the First National Bank of Corinth became insolvent, to sell and apply the proceeds to the debt the First National Bank of Corinth owed it, and that it was the duty of appellee to sell said county and municipal bonds when their market value was eighty cents to ninety cents, which would have enabled the First National Bank to have materially reduced its indebtedness to the Federal Reserve Bank, the appellee here. It was further alleged that it is generally understood that in the near future the First National Bank of Corinth will pay to its creditors seven and one-half per cent, or ten per cent in dividends, and that the appellee would receive, at least, twenty thousand dollars from such dividends, and that, if the appellee would sell the collateral and collect this dividend, there would be a sufficient amount to pay the obligations in full. It was further alleged that there were other notes pledged to the appellee to secure the debt of the First National Bank of Corinth to it, which notes had no offset against the First National Bank, and that the appellant had placed with the First National Bank as collateral security certain notes, and these notes had passed to the appellee being attached to notes of the appellant, and that appellee knew that the notes were collateral security, and that they should be applied to a reduction of appellant's note to the First National Bank of Corinth. It was further alleged that he had placed certain notes and deeds of trust with the First National Bank of Corinth, which it had agreed to take at their face value, and that said notes bore eight per cent interest, and were worth their face value; that the appellee knew these facts, and is charged with the knowledge thereof. It was further alleged that appellant does not know the exact amount due by the First National Bank of Corinth to the appellee, and does not know the exact amount in kind of the notes and assets which appellee has as collateral security, and that appellant would not be able to make his defenses in a court of law, but could only avail of them in a court of equity, and that, in order for him to avail himself of such defenses, it would be necessary for this cause to be transferred to the chancery court so that complete equity could be fully and fairly administered. He further alleged that on the 24th or 25th day of December, 1930, the First National Bank of Corinth closed its doors, and that, for some time before this closing, the appellee had a representative at Corinth, the said Corinth bank being largely indebted to appellee, and that appellee was thoroughly and fully familiar with all the conditions of said bank, its collateral, and its value, etc.; that the appellee, through its representative, took a keen interest in said bank, as a result of which the First National Bank of Corinth reopened on January 24, 1931, and the people were urged to make deposits and do business therewith; that the appellant did not know the condition of said bank, but continued to do business with it; and that the appellee had superior knowledge of the condition of said bank, and actually knew the condition at all times from the temporary closing in 1930 until the bank was finally closed. It was further alleged that the appellant, along with other depositors, was constantly assured that the bank was fully solvent; that the appellee was conversant with every fact, and knew that the depositors having deposits in the First National Bank were entitled to offsets as against their debts to it. It was further alleged that the appellant is entitled to many equitable defenses, and that, in order to receive the benefit thereof, he is entitled to have the case removed to the chancery court.

The motion to remove the cause to the chancery court was overruled, but the order overruling it does not appear to be dated.

Interrogatories were filed under Section 1551, Code Code 1930, seeking information of the appellee, a nonresident, as to many things pertaining to the business of such appellee and its transactions with the First National Bank of Corinth. These interrogatories were filed on January 23, 1933, and served on the attorney for the appellee on January 25, 1933, and on motion of the appellant were stricken out. Prior to the order striking the interrogatories or refusing to compel the appellee to answer them, the pleas of appellant had been filed. The appellant pleaded the general issue, giving notice thereunder that he would prove on the trial that the appellee was not the holder of the notes acquired as collateral, but that same are the property of the First National Bank of Corinth; that said First National Bank of Corinth was and is indebted to the appellant in the sum of about one thousand four hundred dollars; that the appellee knew that the appellant was entitled to an offset against said note in a sufficient amount to discharge same; that the appellee had knowledge of all these facts during all the time complained of; that the appellant had delivered to the First National Bank of Corinth a note signed by H.B. Phifer and wife on which there was a balance due of about two thousand dollars, which note had been bought by the appellee, it having been sold with the understanding and agreement that it was to be applied on the note sued on and as payment to that extent; and that the appellee knew of said agreement. It was alleged that appellant would further show that a short time before the closing of the First National Bank of Corinth in November, 1931, he was indebted thereto in the sum of eight hundred dollars, and had pledged as security a note and trust deed executed by J.T. Ragan, and, a short time before the bank closed, he had paid said eight hundred dollar note, with the understanding on the part of the bank that it would send appellant the Ragan note and trust deed, which was worth its full face value; that the appellee knew about the said eight hundred dollar loan, and knew that the Ragan note was pledged as security therefor, and is the property of appellant, and that appellee took, retained, and converted to its own use the Ragan note, knowing full well that the First National Bank of Corinth had no lien, right, nor claim thereto.

As a second plea, it was alleged that the appellee did not acquire the note sued on in due course of business and with no notice of defects therein; that the note provides among other things, that all money on deposit to the credit of the maker should be applied to its payment; that the appellant had on deposit, and still has, about one thousand four hundred dollars, which should be applied as payment on said note, or as a set-off, and that the appellee had full knowledge of this fact; that the note sued on is not the property of the appellee, but is merely held as collateral, and appellee is only the pledgee of said note. He further alleged that the appellee did not advance any specific amount on the note sued on, but that said note was one of many taken by appellee at the same time for its indebtedness, and that appellee still holds many of said notes as collateral for the balance due it by the First National Bank of Corinth, if anything, said collateral amounting to some two and one-half or three times the amount of the indebtedness of the bank to it. He further alleged that said First National Bank of Corinth was first closed on or about the 26th of December, 1930, as a result of a run thereon; that during the time of the run the appellee's representative emphatically and unconditionally assured the public that the First National Bank of Corinth was fully solvent and capable of meeting its obligations, when appellee then knew that said bank was insolvent, and incapable of meeting its obligations, because appellee had been furnished with the result of the examination. He further alleged that the appellee was instrumental in having the city of Corinth, Mississippi, sell and deliver to the First National Bank about one hundred forty thousand dollars of county, municipal, and district bonds, in order that the bank might use them as security for additional loans, and that appellee knew that said First National Bank did not pay the city of Corinth anything for said bonds. He further alleged that during said time the First National Bank of Corinth was heavily indebted to the appellee in a sum in excess of two hundred thousand dollars, and that, when the bank reopened on January 24, 1931, and after said bonds had been sold, the appellee made no further advances to the First National Bank of Corinth, and yet required it to pledge with it, as additional security, and without any consideration therefor, that the reasons for said dealings were that the appellee knew that said First National Bank was insolvent, and that, if it reopened, appellee could get further security for its debt, and that it would profit directly by getting possession of said bonds as additional security. It was further alleged that the appellee, under the law, owed the duty to appellant, as well as to the First National Bank, to manage, handle, preserve and control, care for, and collect, the securities pledged to it by said First National Bank, and not to sacrifice and dispose of same; but that appellee is selling, disposing, and sacrificing the collateral in utter disregard of the rights and equities of appellant and other depositors of the First National Bank.

In the third plea, he set out the allegations with reference to the Phifer note referred to in the notice under the general issue plea.

In the fourth plea, he alleged that some weeks prior to the closing of the First National Bank of Corinth he borrowed from said bank eight hundred dollars, pledging with it as security the note of J.T. Ragan, payable to appellant, for one thousand five hundred dollars, secured by a trust deed on city property in Corinth, and there is still due one thousand five hundred dollars on said note, with interest, and there was no agreement or intimation, written or verbal, that said note was being pledged as security for any debt other than the eight hundred dollars; that he paid this eight hundred dollar note with interest, and was promised that the bank would mail the note and deed of trust to him, but the bank failed to do so, and that the appellee took, held, and converted the said note and trust deed to its own use, without any legal or lawful right to take said Ragan note and convert it to its own use. Appellant asks in this plea for judgment against the appellee in his set-off and counterclaims for the difference between the values of the Phifer and Ragan notes, and the note sued on in this cause.

In the fifth plea the notes and deeds of trust from Phifer and Ragan were made exhibits thereto, and it was alleged that these were taken by appellee and converted to its use, and that appellee is indebted to the appellant for the full value of said notes with interest.

The appellee moved the court to strike from the files the plea entitled "Notice under General Issue," averring that it is not a plea of general issue, and that an attempt is made thereunder to set up a defense against the payee which is not a defense against the pledgee, and is also an attempt to alter a written contract by oral proof.

The appellee demurred to pleas Nos. 2, 3, 4, and 5, which demurrer was, by the court, sustained.

A motion to transfer a cause to another court must be made in the court below in order to give the court opportunity to transfer it. And, if the court refuses to transfer a cause, and correctly decides the lawsuit, and gives the parties their full rights under the law, we are powerless, under section 147 of the Constitution, to reverse the lower court. But, if other questions are considered, and substantial errors are made, we can reverse and remand a cause to the proper court, if necessary.

When the court overrules a motion to transfer, the parties themselves must then have formal pleadings setting up all rights existing under the law, and, if the court retains jurisdiction and administers justice according to the law, although the case may belong in another forum, the judgment will be affirmed here.

In the case before us, we think the pleas setting up equitable defenses were valid in two particulars: (1) An equitable right for discovery; and (2) an equitable right to a marshaling of its assets.

The allegations on the motion to transfer and also the special pleas showed that the appellee had ample security which had no offset against the First National Bank of Corinth, and that, if these had been resorted to and applied to the payment of appellee's debt, they would have discharged the liability, and therefore the appellee would have had no demand against the appellant.

The pleadings alleged that the notes were taken as collateral and were not purchased outright by the Federal Reserve Bank of St. Louis, for value, without notice of defects.

Where a creditor has a claim upon two funds, another having a claim to one of them may compel him to first go against that one to which the complainant has no claim. Davis v. Walker, 51 Miss. 659, and Millsaps v. Bond, 64 Miss. 453, 1 So. 506.

The marshaling of the assets of a debtor, and the fixing of the priorities of creditors, can only be accomplished in chancery. Johnson v. Moyse (Miss.), 12 So. 483, not reported [in State reports]; Cain v. Moyse, 71 Miss. 653, 15 So. 115.

The effect of section 147 of the Constitution is to give the circuit court power to administer equity in cases arising in that court, and, if the judge of the circuit court elects to do so, this court cannot reverse for that reason alone. But, of course, the Constitution does not intend that the circuit court should retain equitable cases, or that the chancery court should retain common-law cases, but only that the public may not suffer by a mistake of judgment as to whether the case is one for equity or common law. If the right result is reached, although the case was in the wrong court, the judgment will not be disturbed.

However, if there are causes independent of the jurisdiction, as to whether the case is an equitable or common-law case, and the party has been denied a legal right, or an equitable right, the judgment of the court will be reversed, and the case will be sent to the court which is best fitted to administer justice.

In Warner v. Hogin, 148 Miss. 562, 114 So. 347, 348, in the third syllabus, it is stated that a "cause cannot be reversed because of having been transferred to wrong court unless complaining party has been denied substantial right thereby." Constitution 1890, sec. 147. In the body of the opinion the court said: "The chancery court and the circuit court cannot make football of a case by kicking it back and forth from one to the other. Under our constitution and statutes, when one of these courts transfers a cause to the other, the court to which it is transferred has jurisdiction to finally dispose of the cause. When such a cause is appealed to the supreme court from either the chancery court or the circuit court, it cannot be reversed, under section 147 of the Constitution, on the ground alone of a mistake of jurisdiction; but if, in addition to that error, the complainant party is denied a substantial right on account of the cause being in the wrong court, the supreme court will reverse it and send it to the right court."

It was never intended by section 147 of the Constitution for one court to take and retain jurisdiction, and still deny a party his rights under the law. If he has equitable defenses of which he cannot avail himself in the circuit court, and moves to be transferred to the chancery court, the circuit court should transfer the cause, so that the party may have the benefit of his equitable defenses. The legal rights of a party are not to be sacrificed, because a court declines to administer the relief to which he is entitled.

The judgment will be reversed and the cause will be remanded to the chancery court of Alcorn county, pleading to be made in conformity to equity practice.

Reversed and remanded to chancery court.