International Banking Corp. v. McGraw Tire & Rubber Co.

259 F. 381, 170 C.C.A. 357, 1919 U.S. App. LEXIS 1647

• Court: Court of Appeals for the Sixth Circuit
• Decided: January 9, 1919
• Docket: Nos. 3167, 3168
• Status: Published

Opinion

DENISON, Circuit Judge

(after stating the facts as above). The trial court concluded that the controlling question was as to the debtor and creditor relationship of the parties. In a thorough and careful opinion, it was concluded as matter of fact that this relationship did not exist between the banks and the defendant, but that it was the debtor of Dockendorf, and Dockendorf was the debtor of the banks, and it was therefore held that the defendant had the right to pay Dockendorf in full this indebtedness to him and be discharged therefrom, and was under no duty to require him to surrender any outstanding securities which it had theretofore pledged to him. There are many considerations in the written contract and in the course of business tending to support this conclusion of fact. There are other items of proof looking in the contrary direction. We cannot regard this question of fact as controlling, and we therefore pass it by without discussion, assuming, for the purposes of this opinion, that the trial court was right.

[1] We think the vital question is that of notice. It is not to be disputed that a debtor, who has pledged with his creditor any nonnegotiable security, whether tangible property or choses in action, and who is not chargeable with notice that the creditor has rightfully parted with the security so pledged, may pay his debt to his creditor and thereby become entitled to the return of his security, and that, under those conditions, the risk is carried by the second transferee of the property who has not given notice of his rights.¹ It must be equally clear that, where the creditor, who had received this pledge, has a right himself to repledge or retransfer the property for his own benefit, and where the principal debtor is chargeable with notice that such re-transfer has been made, if he pays his debt without obtaining the return of the property pledged, he does so at the risk of being compelled to satisfy the claim of the second transferee in order to get his property back.

[2] In order to determine the question of Dockendorf's right to transfer these accounts over to the banks and the question of notice to the defendant on or before April 10 that such transfer had been made, it is only necessary to refer to the contract provisions above quoted, and especially to clause 5 and the provision quoted just before that clause. It is not easy to conceive a more express and complete admission by defendant of notice of the assignments in question. It seems clear to us that, in the face of this contract, the defendant cannot be heard to say that it is not chargeable with notice that Dockendorf had made that very reassignment for the purpose of making which it had made the assignment to him. Certain it is that only a clear case of justifiable belief by the defendant that Dockendorf still retained the accounts and had not transferred them could support the theory that it was not chargeable with notice of his transfer. Instead of such a clear case, we find that, when the defendant made the payment of $207,216, it was advised that Dockendorf might have transferred these accounts, and that, therefore, its only safe course was to require the surrender of the certificates of Indebtedness, and then was further advised that there would be no serious danger in paying Dockendorf, because, if he did not use the money to redeem outstanding certificates, he would be guilty of embezzlement. Of course, there could be no embezzlement unless the certificates belonged to some one else. From the fact that Dockendorf did not simultaneously, produce and return these certificates, the very natural inference would arise that he had disposed of them elsewhere; and, indeed, we cannot read the testimony of the president of the defendant otherwise than as containing substantial admission that he took it for granted that Dockendorf might have used more or less of these certificates somewhere, from time to time, in connection with obtaining from some one more or less of the funds advanced, and that defendant relied upon Dockendorf to use the $207,000 to redeem the certificates as the accounts matured, in so far as there might be such outstanding certificates. Under these conditions, it must be held that the defendant is chargeable with notice of the assignments which had been made to the banks.

[3] We note two criticisms of this result, which require comment. The provision quoted just before clause 5,'by its very words, referred to an expected transfer to some person or financial institution, to serve as security for a loan “to be made to the undersigned.” It is said that these transfers by Dockendorf to the banks were to secure loans to Dockendorf, and hence were not within the scope of the notice to be inferred. We cannot think this a substantial distinction. The loans in question were, in ultimate effect, made by the banks to the defendant ihrough Dockendorf, even though no privity of contract arose between original lender and ultimate borrower. The precise expected form of doing business had been departed from, but the substance was the same, at least as to the reasonable inferences regarding notice. The issue is not whether knowledge or express notice by the defendant is established; the issue is whether, under all the facts and circumstances, there was enough to put the defendant on notice that the accounts had been transferred; and we are satisfied that there was enough.

[4] The other criticism is that the course of business, continued for a long time, justified the defendant in disregarding any notice it might otherwise be thought to have and in treating the accounts as belonging to Dockendorff. This course of business as to current payments by defendant to Dockendorf is not shown by the record, but there seems no reason to doubt that it took the natural and expected path, and that from time to time defendant computed the amounts which it had received in payment of assigned accounts and sent its check to Dockendorf for the amount loaned thereon, and that he receipted for the same. The record does show that he did not return the certificates of indebtedness which this payment would operate to redeem. We find nothing in this course of business justifying any belief that Dockendorf was not assigning over the accounts “to some person or financial institution,” as the agreement contemplated he should do. Even if it may have been the custom for defendant to pay Dockendorf round sums from time to time, without reference to specific accounts, or yet to remit the full amount of accounts collected, this would not interfere with charging against defendant that notice which is here the vital thing. The contract expressly provided that, in spite of the transfer over by Dockendorf of an account, the amount thereof, when it was paid, should be remitted by the defendant to Dockendorf; and the fact that business was done pursuant to this arrangement or somewhat variant therefrom cannot avail to escape the effect of a notice declared by the contract. The practice not to return the redeemed certificates may have legitimate bearing on the issue, but it cannot control. As is pointed out hereafter, whenever an account was paid by the principal debtor to the defendant, the outstanding certificate of indebtedness ceased to represent anything; there was nothing to return.

[5] The remaining vital question (which presents itself) is whether Dockendorf was so far the agent and representative of the banks in the subject-matter that the payment of the $207,000 to him must be considered as a payment to the banks. The idea that such agency existed is more or less inconsistent with the theory that there.was no obligation from the defendant to the banks; but, for the purpose of ascertaining the merits of the contention, we overlook any such inconsistency. The claim rests upon clause 5 above quoted. Whenever an assigned account was paid to the defendant, the.proceeds were to be remitted to Dockendorf. The banks knew of this arrangement, and, by accepting the certificates of indebtedness with this agreement indorsed, they acquiesced. Clearly, Dockendorf became their agent for this purpose; but did the scope of his agency extend to receiving for the banks, from the defendant, out of its funds, payment for the loans secured by the assignment of the unmatured accounts ? Receiving such payment is clearly not within the letter of the authority; and we are compelled to think that it was also outside of the spirit and substance of the agency.

In reaching this conclusion, we are not inclined to accept as controlling the mere distinction between a debt due and a debt not due, although it is true enough that agency to receive payment when due does not necessarily, or perhaps generally, imply agency to collect before due. If the claim of lack of authority were reduced to the bare proposition that, although Dockendorf would represent the banks in receiving payment from the defendant on its specific debt if due yesterday, yet he would not bind the banks by receiving payment of the same debt if due to-morrow, it would in this case stand on rather narrow ground. There are two reasons much more forceful than this mere distinction: The first is found in the improbability that there would have been any actual intent to give such great authority as was here assumed. It appears to be the fact that .Dockendorf, although he called himself a banker, was really a broker, finding customers who wanted to borrow money in this way and then finding banks who would lend it. There is no proof as to his financial responsibility, and no reason to suppose that the banks would not be ordinarily prudent in dealing with him. These assigned accounts were mostly in amounts of less than $1,000. They were due and would be paid from time to time. The liability in favor of the banks that would accrue against Dockendorf under clause 5 would be for only such ones of these items as might accumulate during the short time for which returns by him to the banks could be suspended without attracting inquiry or investigation. A few thousand dollars would seem to be the total liability naturally to be expected; but if the agency extended to receiving payments from the defendant of its total debt at any time, the liability then would reach very large sums. In fact, it amounted to more than $200,000. That the banks should have intended to trust Dockendorf with receiving a few thousand dollars for them, to be turned over to them from day to day in the regular course of business, would be entirely probable; that they would intend to make him their agent to receive $200,000 and entirely close up the whole line of business and tinder circumstances where he could retain a large part of the amount, as it turned out more than $100,000, for more than 60 days without discovery by the banks, would be distinctly improbable. An agency of the larger scope must be supported by clear proof before its existence can be rightly inferred.

The other reason lies in the clear distinction between the two classes of transactions. The account assigned to the banks was a chose in action; it was property, and it stood as a valuable security. The moment the account was paid by the debtor to the defendant, the property or security which had been assigned to the bank disappeared from existence. There was nothing for the bank to assign back either to Dockendorf or to the defendant. The claim of the bank attached, instead, to the proceeds. These were the property of the bank, in the hands of defendant or of Dockendorf. With regard thereto, the banks had the rights of ownership, whatever complications might develop. Wherever the trust fund could be followed, it could be recovered. Payment made by the defendant on its own account was a different tiling. The security — the debt assigned — continued in existence. It would be expressly, or by operation of law, retransferred to the defendant. The situation covered by clause 5 had not arisen and never could arise. The agency created by this clause was to receive for, and transmit to, the banks specific items of property already belonging to them. The agency now alleged against the banks was to collect for them, in effect by the sale of their pledged security, large sums at a time and in a manner never contemplated. We think it clear that the two agencies are so dissimilar that the creation of the first does not imply the existence of the second.

[6] Much is said about the lack of notice from the banks-to defendant, and the proposition is urged that, where the creditor has made successive assignments of the same chose in action, the assignee who first gives notice to the debtor gets the better title. We agree with the District Court that the cases cited upon this proposition are not pertinent. They deal wholly with the right to recover • against the debtor in the account which is assigned, and they have no application to a case where a creditor assigns accounts and then buys them back again. In such case, the only question must be whether he is, at the latter time, chargeable with notice that there has been an intermediate transfer to some one else: and this question we have considered.

Upon the general equities between the parties, the relative position of the defendant is — to sa.y the least — not strong enough to justify hesitation in enforcing the applicable rules. It is fairly to be assumed that the defendant did not wish the assignments to be known .to its debtors, and that Dockendorf did not wish the defendant and the banks to come into direct communication with each other. In both these desires all the parties acquiesced. The banks received assignments duly executed by defendant and expressly reciting that the accounts were assigned by the defendant for the purpose of being assigned to some bank. The only object of notice from the banks to defendant would have been to prevent action by the defendant, based on the supposition that the accounts had not been assigned, and in the face of this recital there was no object remaining for a notice to serve. We do not see any negligence on the part of the banks; on the other hand, the conduct of the defendant in making payment without getting in the certificates of indebtedness was most extraordinary and in violation of the rules of ordinary business prudence.

The complainant in each case is entitled to a decree in accordance with the prayer of the bill, and, accordingly, both decrees are reversed, and both cases are remanded for such proceedings.

1 There is a class of cases of pledge, with power in the pledgee to repledge on his own account, — as is common with stockbroker and customer, — where the second pledgee’s title is sustained even after satisfaction of the first pledge. In stating the rule above, we assume that in this class of cases, the owner, paying his own debt, is chargeable with notice of the second pledge, because of the authority given, the failure to produce and return the property pledged or the custom of the business. Whether or not this assumption as to their reasoning is correct, it has not seemed necessary now to consider or decide the claim of the banks to relief upon the analogy of the rule in these stockbroker cases.