Perth Amboy Gas Light Co. v. Middlesex County Bank , 60 N.J. Eq. 84 ( 1900 )

Pitney, V. C.

Before considering the several claims of the appellants, with their individual characteristics, it is well to determine the principles applicable to cases of this kind. And, in the first place, it is to be borne in mind throughout that this is a contest between the different 'creditors of the bank, and not a contest with the bank itself as a corporation; or with any of its officers. It is not a question of whether the officers and directors of this bank, other than the cashier, who is now serving a term of penal punishment for his misconduct in connection therewith, are personally liable, either civilly or criminally, for their failure, through neglect, to ascertain the peculations of the cashier; but it is a question whether any one of these creditors, who are all, confessedly, honest creditors, and entitled to their pay in full if there were funds enough in the hands of the receiver to make such payment, shall, in default of sufficient funds for that purpose, have a preference over the others.

In the start we are met — as against any such preference— with the general rule prevailing in courts of equity that equality is equity.

The nature of the contract which arises between an ordinary depositor and an ordinary bank of deposit, upon the making and receiving a deposit, is perfectly well settled. It is not a contract of bailment, but it is a contract of loaning of money, and places the parties in the attitude of debtor and creditor. When the depositor hands money to the receiving officer of the bank, and it is accepted by the bank as such, the bank becomes a- debtor to the depositor for the amount thereof, provided it is not directly or indirectly made in payment of a debt due from the depositor to the bank.

There is a possible exception to this in the case of a deposit of something other than cash, or other than a cheek of another depositor, upon the same bank, drawn in favor of the party depositing it. In the last-mentioned case, as soon as accepted, the check is charged to the drawer and credited to the payee. No money’passes. It is a mere change of credit. The effect is precisely the same, however, so far as related to the character of the transaction, as if actual cash had been deposited. But where the deposit consists of checks or drafts drawn on a third part}7, whether a bank or an individual, the result may be (1) either an increase of the debt from the bank to the depositor, or (2) a mere bailment of the check or draft, with the bank as an agent to collect the same for and on account of the depositor, and credit him with the amount when collected. The actual result depends upon either what actually passes between the parties at the time, or what the custom and practice prevailing between them is, and upon the situation of the account between the dealer and banker. If a depositor deposits a check or draft on a third party with the understanding, either expressed or implied, that he is to draw against it at once as if it were cash, and the bank agrees to accept it and treat it as cash, and the depositor draws against it before the amount is realized by the bank, then it is properly treated as a deposit of cash. Or if the depositor is already indebted to the bánk, and the deposit is received in whole or partial payment, the same result follows. But in the absence of an understanding or situation of this kind it is a mere bailment.

The subject was discussed by Mr. Justice Mxon, in Balbach v. Frelinghuysen, 15 Fed. Rep. 675 (at p. 682), and I concur in his conclusions as there stated.

The language of Chancellor Zabriskie, speaking for the court of errors and appeals, in Titus and Scudder v. The Bank, 9 Vr. 588 (at pp. 592, 593), is instructive on this topic.

In cases where the result of the contract is that of lending and borrowing, the matter is closed when the deposit is made, and the depositor can, in case of insolvency, reclaim his deposit, as against the general creditors of the bank, only upon certain conditions. Eirst, he must, show that the officers of the bank who transacted the business with him knew of the insolvent' condition of the bank at the time they accepted his deposit; and were guilty of actual fraud in accepting it. Second,' he must be able to trace and follow his deposit into the assets which came' into the hands of the receiver or assignee.

The ease was likened by counsel in argument, and I think correctly likened, to that of a trader who, knowing that he is' insolvent, but whose' credit is' still good, goes into the market,' and, on the strength of that credit, buys goods for the purpose either of swelling his general'assets, or for the purpose of preferring some particular creditor, knowing at the time he makes the purchase that he will not be able to pay for the goods. In such case he commits an actual intentional fraud upon the seller of the goods, and the seller, -upon being informed of it, may rescind the contract of sale and recover the very goods, if he can find them and they have not passed into the hands of a bona fide purchaser for value.

So if the unsuspecting depositor in a bank, supposing the bank •to be solvent, makes a deposit, and it is accepted by the officers of the bank with full knowledge that they never will be'able to pay it back to him, he may rescind the contract of lending and reclaim his deposit from the assignee of the insolvent bank, provided he can follow and find it and it has not passed into the hands of a bona fide purchaser. And if it appears that his deposit was in cash and that the very money that he deposited was in the vaults of the bank at the time it closed its doors, and came, necessarily, into the hands of the assignee or receiver, he may reclaim it, although he may not be able to identify the very coin or bills which composed the deposit. This last is an extension of the rule as it formerly stood. The reason of it is that it is clearly proven that the assets .of the bank are actually increased by the amount of the deposit, and that the very cash came to the hands of the receiver or assignee.

This was held by the circuit court of the United States for the district of Indiana, in the case of Wasson v. Hawkins, reported in 59 Fed. Rep. 233. The opinion in that case is well reasoned and contains a reference to most of the authorities up to that date (1894), and was relied upon by counsel on both sides in this ease. The cause arose on demurrer, and I will stop to state the admitted facts, namely, that five minutes before the bank closed its business on the last day that it was open the plaintiff deposited in the bank a sum of money in cash and another sum in checks drawn on other banks, and that all of the checks were received as cash and credited to the depositor’s account in his pass-book; that no part of the actual cash deposited was paid out by the bank prior to its suspension, but remained in the bank until after the appointment of the receiver; and the checks so deposited were, on the following morning, collected by a clerk ■in the employ of the bank, and the proceeds held by the bank until the appointment of the defendant as receiver, when such proceeds were delivered into his hands as such receiver. The bank was known by the president to be insolvent. It was held on the statement of these facts that the case was made out against the receiver. The judge, in delivering judgment, states his conclusions as follows:

“The reception of the money and checks, under such circumstances, was a fraud upon the plaintiff, and entitled him to rescind the transaction, and recover back his deposit from the bank. The keeping of the bank open, and the conducting of its business in the usual manner, constituted a representation to its customers of the solvency of the bank, upon which they had the right to rely; and, if the bank was known to be insolvent by the officers who were charged with its management, the concealment of that fact from a person about to make a deposit would constitute a fraud upon him. The title acquired by the bank to the money and cheeks deposited under such circumstances would be voidable at the election of the depositor, who could bring suit to recover his deposit without any previous demand. The bank would become a trustee ex maleficio, and would hold the deposit for the use of the depositor and subject to his right of reclamation.” ■

In contrast, but, as I think, not inconsistent with that case, is the ease of In re North River Bank, in the New York supreme court, General Term, 14 N. Y. Sup. 261, where the deposit was made about two hours before the bank closed, and the cash became commingled with the cash of the bank, and large sums, of money were paid out upon cheeks after the deposit, so that it could not be known that the money remained there at the closing of the bank.

In disposing of the matter, Mr. Justice Van Brunt said that the ease was distinguishable from Craige v. Hadley, 99 N. Y. 131. In the latter ease the deposit was of drafts on Mew York, sent by the insolvent bank at Buffalo to Brown Brothers & Company for collection, and by them collected. To the suit against the receiver of the insolvent bank Brown Brothers were made parties defendant because they still had the money in their hands, and paid it into court in discharge of their liability to. account, so .that the money was capable of being followed and identified. While in the North River Bank Case, to use the language of the learned judge: “The amount deposited by the petitioner had gone into the general funds of the bank. There is no proof that it ever reached the hands of the receiver, and there is no proof but that it has lost its identity. There is no pretence that any particular $533.42 which came into the hands of the receiver was the $533.42 deposited by the plaintiffs, non constat, but that it may have been paid out during the one or two hours that the bank was doing its business. Unless the money can he traced, the petitioner could claim no preference."

The nature of the contract between the depositor and the bank was stated clearly by Mr. Justice Andrews in the case of Craige v. Hadley, supra.

And the similarity of the case of a banker who receives a deposit, knowing he is insolvent, and that of a trader who purchases goods under like circumstances, was stated and maintained by the court of appeals of New York in the anonymous case reported in 67 N. Y. 599.

’ It was argued by the counsel for the creditors that it. was not necessary to show that the very cash deposited came into the hands of the receiver or assignee, provided it sufficiently appear that the amount of the assents in. his hands are increased to that extent; and reference is made to the language of the late Justice Bradley, in Frelinghuysen v. Nugent, 36 Fed. Rep. 229 (at p. 239), where, in stating generally the rule in such cases, and after speaking of the right to follow property, he says: “But if it became confused with other property of the same kind, so as not to be distinguishable, without any fault on the part of the possessor, the equity was lost. Einally, however, it has been held as the better doctrine that confusion does not destroy the equity entirely, but converts it into a charge upon the entire mass, giving to the party injured by the unlawful diversion a priority of right over the other creditors of the possessor. This is as far as the rule has been carried.”

I do not understand the language of the learned judge to bear the interpretation put upon it by. the counsel of the appellant creditors. I do not think he meant to say that there could be what he calls “a charge upon the entire mass,” unless it appeared affirmatively that the identical contribution to the mass still remained a part of it. In other words, I am unable to perceive any necessary conflict between the language used by Mr. Justice Bradley and that used by Mr. Justice Yan Brunt. It is manifest from the context that what Mr. Justice Bradley said was obiter, and written without any intention to lay down an exact rule. He was there dealing with a question of the investment of the moneys of the bank in personal property, which was attempted to be reclaimed by the receiver.

I think the rule is stated with accuracy by Mr. Justice Baker, in Wasson v. Hawkins, supra (at p. 236), thus: “It is charged in the bill, and admitted by the demurrer, that the identical coins and bank notes deposited by the plaintiff remained in the bank when it stopped business, and came into the hands of the receiver, who now has them in his possession as a part of the general mass of coins and notes held by him as such receiver. In such a ease the identification is sufficient to entitle the depositor to follow and reclaim the deposit made by him. Although the identical coins and bank notes cannot be ascertained, yet, as it is admitted that so much in coins and bank notes belonging to the plaintiff is in the common mass, he is entitled, in equity and good conscience, to take so much out. If he does not withdraw from the common mass the very coins and bank notes deposited by himself, no injustice is done, for he leaves an equitable amount of his own in place of every coin of bank note deposited by another.”

The rule so stated is supported by what was decided in the Matter of Cavan v. Gleason, 105 N.Y. 258 (at pp. 262, 263), and also in Atkinson v. Rochester Printing Co., 114 N. Y. 168. At p. 175 the court says: “The fact that the defendant became a creditor of the insolvent bank through the fraud of its officers, and the bank a trustee ex maleficio, gave the defendant no right to a preference over other creditors, unless it could trace and recover its property.”

Against this general result the appellants rely particularly upon the ease of Somerville v. Beal, decided by the circuit court of the United States for the district of Massachusetts, and reported in 49 Fed. Rep. 790, and again, on appeal, in the circuit court of appeals, in 50 Fed. Rep. 648. That case was referred to by Mr. Justice Baker in Wasson v. Hawkins. It was a suit by the city of Somerville to recover from the receiver of the Maverick National Bank the proceeds of certain checks, and, like Wasson v. Hawkins, was heard on demurrer. The checks were deposited just before the failure of the bank, and were drawn on other banks, but finally collected by the bank examiner who took possession of the bank, and the proceeds held by him and turned over to the receiver, and were kept by him separate and distinct from the other funds of the bank. And it was held that, as the bank was irretrievably insolvent at the time the deposit was made, and known to be so by the officers of the bank who received the deposit, the demurrer to the bill should be overruled. The principal question argued was whether or not the checks became the property of the bank by reason of their having been endorsed for deposit and accepted by the officers of the bank as a deposit and credited outright to the city on its bank-book.

Then, returning to the case in hand, with .regard to the knowledge of insolvency by the president of the bank, who was momentarily in its management at the time when these deposits were received, the evidence is quite plain that he, nor any of the other officers of the bank, except the cashier, did not know or suspect, or in anywise realize the true situation of the bank.

Against that result two suggestions were made. Eirst, that the fact of shortage in the package of the savings bank money on Monday morning, coupled with the failure of the cashier to appear, was so strong an indication of a default and direct theft that the officers should have acted upon it immediately. But it is impossible to believe that the president of the bank did not act in perfect good faith in. honestly supposing that the story of the cashier was true. He was of highly respectable family; his father lived in the neighborhood, was a man of wealth and respectability, and bondsman for his son to a large amount. Besides, it is to be observed that the suspicions of the officers were directed more particularly toward the theft from the savings bank than toward any from the county bank; and an inspection by Convery of the state of the account of the county bank with the Park Bank was a mere incident to the investigation of the affairs of the savings bank and the safety of their bonds deposited for safe keeping in Yew York City.

But, in the second place, the counsel for the appellants take the broad ground that the officers of the bank were so negligent in their management as to have almost shut their eyes to the actual truth, and they must be chargeable with knowledge of such facts as they could have easily learned by a slight examination.

It must be admitted that the habitual neglect of the officers of the bank to regularly and periodically examine and verify the account of the county bank with the Park Bank, in Yew York, which they could have done very easily by looking into the reconcilement sheets and examining the vouchers, which were not concealed from them, shows great neglect on their part,, and furnishes a strong argument in favor of their personal' liability to make good to the receiver the losses which have been incurred. But that is not the question here. That question is simply whether the president of the bank was guilty of actual fraud in accepting the deposits in question. A careful examination of the evidence satisfies me that there is no ground for any such position. He was deeply interested in the welfare of both banks. Yot the least connection is shown between him and the dishonest cashier in any of the latter’s transactions. And I am of the opinion that it is actual, as distinguished from constructive, fraud, and culpable negligence, that is necessary in order to maintain the appellants’ eases.

Of course, it almost goes without saying that the fact that the cashier knew for months that the bank was insolvent is not notice to the other officers of the bank. It might as well be argued that an owner of a chattel which has been stealthily stolen from him by his employe is chargeable with notice of such theft and estopped from asserting his title to the stolen chattel when found. The authorities are. all against the appellants in this respect. It is not necessary to cite them. And if that contention should prevail, and the officers of the bank be charged with knowledge of what they might and ought to have known, then they are chargeable with the knowledge of the insolvency of the bank for several months before it failed, and all the depositors who made deposits after it became insolvent would be entitled to a preference — a result which would, probably and almost certainly, bring in all upon an equal footing.

But, it is argued that, granting that the conduct of the president, between Monday morning, July 10th, and Thursday at two o’clock of July 13th, is excusable and consistent with honest intentions, yet that when he received, at about two o’clock on the day last named, the phonetic Communication from Mr. Con-very giving the state of the account of the county bank with the Park Bank, he must be chargeable with actual knowledge that the county bank was insolvent, and that his conduct in allowing it to remain open for one hour cannot be justified; and further stress is laid on the fact that after the regular .closing of the bank for business with its regular dealers at three o’clock, the .-accounts were made up and checks on foreign banks were for-warded for credit, especially with the Park Bank.

The circumstances which occurred on the receipt of the infor-mation from Mr. Convery by the president and the two bank ■ examiners have already been stated. The president proposed immediately to close the bank. . The examiners advised against it, and suggested the possibility of a mistake and the propriety • of immediately proceeding to New York to verify Mr. Convery’s information. The only train that would carry them thence in time to make such verification on that day left in a very few moments. There was no time for much consideration, and the president yielded to the suggestion of the bank examiners.

Now, just here, I cannot refrain from mentioning what I think was a serious oversight by the three parties — the president and' the two bank examiners — and that was this: they should "have simply given directions to the receiving teller to segregate -each deposit which was received from that time on, and keep it : separate from the funds of the bank, and if checks on the bank -were deposited, to hold them without charging them up to the vdra^vers of the checks, so that, in case it turned out that the '¡bank was insolvent, they could be protested for non-payment by reason of the failure of the bank. That course, as I am well ■informed, has been adopted under like circumstances; and it is to be regretted that it was not adopted in this case. But so far .as appears from the evidence developed before me, it makes little difference in this case, for, as will appear hereafter, most of the claims are founded on credits made earlier in the day. Then, .also, the clerk should have been instructed not to send off any foreign collections for the day until further advice from the president.

But I cannot find, as a matter of fact, that the failure to think ■of this plan, in the confusion and excitement of the few moments given for consideration, amounted to actual fraud.

The question of the effect of sending off checks to other banks after the bank closed, and after the president, on arrival at blew York, became thoroughly satisfied of the situation .of the bank, is, as to at least two of the claimants, a serious one.

Another question, which affects quite a large sum of money, is as to whether if any of "the appellants are entitled to relief under the law as above laid down, and supposing the president to have been guilty of fraud, they can have such relief where the deposit was made in cheeks drawn on the insolvent bank; and that question must depend, it seems to me, upon the question whether or not it is possible for the depositor to bring his case within the rule above stated, which requires a tracing of the •deposit. When a depositor deposits a cheek of another party on the bank in which he deposits, no money actually passes. The transaction is a mere transfer of credit. The bank owed the drawer of the check a certain sum of money; the drawer, by his •check, ordered that money paid to the depositor; the depositor presents the check, and, instead of asking for the money, he asks for credit on his account for it. The result is that the bank, by .accepting the check, charged it to the drawer and reduced its indebtedness to him just so much, and by crediting it to the •depositor increased its indebtedness to him just so much. The assets of the bank are not thereby increased; and it would seem impossible to hold that there can be any tracing of the deposit. 'There is no money or coin mingled with that of the bank, and the depositor cannot say, "I have handed you money; hand it back to me.” Among the numerous authorities cited by the-counsel and referred to by the judges in their opinions, I can • find none for the position that any such case can be brought within the rule as above stated.

With these general statements, I come to the consideration of each particular claim by itself.

NEWARK BANKING COMPANY AND ESSEX COUNTY NATIONAL BANK.

The two several claims of the Newark Banking Company and the Essex County National Bank, after eliminating from the latter the items consisting of checks on other banks forwarded to-the county bank, which have been adjusted between the parties,, stand on substantially the same footing. They consist entirely, as I understand the case and the proofs, of items of checks-drawn on the county bank, or of notes playable there. The practice between the appellant banks and the insolvent bank was,on the afternoon of each day, after the close of the appellant banks, to make up a list or package of checks of the character' just stated, and mail them to the county bank. They were received by the county bank in the regular course of mail,, early the next morning, and were immediately dealt with by charging them up to the accounts of the drawers of the checks,, and crediting them to the appellant banks severally. The arrangement between them was that, at stated times, the county bank was to pay, and did pay, the appellant banks the balance then due, by draft on New York. The items which reached the county bank on the morning of the 13th of July- — the-last day it was open — were duly credited to the appellant banks, and there is no proof, or ground for inference, that any actual cash was received on any of them or that any of them were credited to the appellant banks after the morning hour. Unless I have misapprehended the details of the several claims an¿ the evidence of the witnesses with regard to them, they can have no preference for any part of their claims other than what has already been given to the Essex County Bank.

LEHIGH TALLEY RAILROAD.

The same is true of the Lehigh Valley railroad. So far as .appears, its claim consists entirely of deposits made from day to day with the county bank in the usual course of business. There is no proof, or ground for inference, that any of the items deposited are exceptional in their character.

JAMES J. NASH.

The claim of James J.- Hash is exceptional in its character. It is based upon divers drafts on third parties living at a ■distance from Perth Amboy, deposited with the county bank, so that the drafts were to be collected through correspondent banks, ■and the claimant has already attempted to intercept the payment of the proceeds of those drafts by those banks to the receiver. If he shall fail in that, and the amount due from the correspondent banks of the county bank is sufficient to cover it, it may be that his case will finally be placed on the same footing as the same sort of items in the claim of the Essex County Bank. It is proper to say that Mr. Hash is not an appellant, but an ■applicant directly to the court.

j. w. EOX.

The claim of J. W. Eox consists simply of a balance due him L,as a daily depositor in the bank. It stands on the same footing as that of the Lehigh Valley railroad. It cannot be admitted except as a general claim.

COLEMAN & BOYNTON.

The claim of Coleman & Boynton, by Horace C. Coleman, for '$766.81, stands on the same footing as that of the Lehigh Valley railroad and that of Eox. He makes a statement in detail of the whole and a special reference to the fact that $227.71 was deposited in the hank on the day it failed — July 13th. But it does not appear at what time it whs deposited, nor of what the-deposit was composed.

GEORGE C. BROWN AND THE RARITAN HOLLOW AND POROUS BRICK COMPANY.

The several claims of George C. Brown and the Raritan Hollow and Porous Brick Company stand on the same footing, as I understand them, as to part of each. The claim of Brown is' based, in part, upon a draft for $1,000, drawn by R. M. Monroe-on Henry S. Hovey, of Boston, payable to the order of Brown & Sons, and endorsed by them to him and by him, and deposited in the county bank on the 12th of July. On the 14th of July, as alleged in the claim (but probably on the evening of the 13th), it was sent by the county bank to the Park Bank, with other items, to be credited to the county bank. The drawee(Hovey) declined to pay (probably because payment was stopped), and the Park Bank is about to bring an action to recover the amount due on the draft.

The claim of the Raritan Hollow and Porous Brick Company is based, in part, upon a check of $2,500, drawn by the brick company on the Manufacturers Fational Bank of Fewark, to-the order of the county bank, and deposited with that bank on the 13th of July, and by the county bank forwarded, on the-evening of the 13th — the last day it was open — to the Park Bank for collection. Payment on that check was stopped at the manufacturers bank, and the Park Bank has brought suit upon it against the brick company.

The brick company and Mr. Brown claim a preference in case-they are obliged to pay the draft and check in question.

Fow, if instead of there being an indebtedness from the insolvent bank to the Park Bank, there was an indebtedness-from the Park Bank to- the insolvent bank, sufficient in amount to cover these items, and other items like them, then I should say that those claims come within the principle which induced the receiver, under the advice of counsel, to accede to the claim-of the- Essex County Bank for preference of like items. They were sent to the Park Bank after it was finally known that the county hank was insolvent; and. had the president or the examiner who remained at Perth Amboy been sufficiently thoughtful and alert, they should have prevented the forwarding of the draft and cheek to the Park Bank. As it is, there is danger, under the rule that prevails in that state, as illustrated by the case of Bank v. Lloyd, 90 N. Y. 530, that they may be .obliged to pay them. Be that as it may, I am unable to see how, under the principles which I have found to be established as governing-cases of this kind, these claims now in question can be allowed, and for the simple reason that the fund cannot be followed. It is swallowed up and lost in the general indebtedness of the county bank to the Park Bank.

I think Terhune v. Bank of Bergen County, 7 Stew. Eq. 367, supports that view.

JOHN HILSDOBF.

I next deal with the ease of John Hilsdorf for $1,887.93. On this a special claim for preference is made for $1,469.93, which was deposited with the hank, on the 13th of July, under these peculiar circumstances: Hilsdorf had negotiated a loan from the savings bank, to be secured by a bond and mortgage for $1,500. The loan had been passed and the mortgage duly recorded, and he was entitled to the money, less the expenses, which, being deducted, left the precise sum of $1,469.93. He called at the bank early on the morning of the 13th to get his money. He kept a pass-book account with the county hank. He saw Mr. Watson, the president, and told him he wanted his money. Mr. Watson handed him a draft drawn by the Perth Amboy Savings Institution to his- (Hilsdorf’s) order, on the county bank, which Hilsdorf endorsed and handed it back, with his pass-book, to Mr. Watson, who gave him credit for it, and handed him back his pass-book. This occurred between ten and eleven o’clock in the morning.

- I cannot differentiate this case from the others which have been dealt with. A very strong argument was made before me in behalf of this man, in which the hardship of the ease was dwelt upon; but the argument tended more to show that Mr. TIilsdorf has a claim against the savings bank, than to show that he has any right to a preference over other creditors as against the receiver of the county bank.

CROSBY & HILL.

The next and last claim is that of the firm of Crosby & Hill. It is for $3,965.49, composed of deposits made from day to day for several days before the failure, that of the 13th of July, amounting to $150.75, being made a few minutes before the bank closed at three o’clock. It was composed partly of check and partly of cash, and the check was sent without being endorsed, so that the messenger was obliged to return to get it endorsed. The proofs do not show just how much of that sum was cash and how much was check, nor upon what bank the check was drawn.

Under the peculiar circumstances, I think that so much of this deposit as was in cash may be fairly inferred was not paid out by the teller and came to the hands of the receiver.

This, I believe, disposes of all the appeals and claims that were presented, and I will advise a decree in accordance with these views.