Leach v. Mechanics Savings Bank , 202 Iowa 899 ( 1926 )

I. I regret to disagree with the majority of my brethren on the question involved in this case; but, owing to its importance, and to my belief that eventually the majority will, of necessity, be compelled to recede from their position here taken, I am filing this dissent.

The real question of disagreement arises from the following proposition: A draft is drawn by one bank on another, and then delivered to the payee, in whose hands it remains. The drawer bank becomes insolvent before the draft is presented for payment, and the receiver of the drawer bank withdraws the fund from the drawee bank. The question is whether, between the receiver and the holder of the draft, the transaction amounts to an equitable assignment of the fund pro tanto.

It is a well settled principle of law that the receiver has no greater or higher rights, but simply stands in the shoes of his principal. Receivers v. Patterson Gas Light Co., 23 N.J. Law 283; Black v. Manhattan Trust Co., 213 Fed. 692; Quincy M. P.R.Co. v. Humphreys, 145 U.S. 82; Officer v. Officer Pusey,127 Iowa 347; 34 Cyc. 191-193. The same rule applies to an assignee for the benefit of creditors (Whitcomb v. Carpenter, 134 Iowa 227; Page County v. Rose, 130 Iowa 296; Nurse v. Satterlee,81 Iowa 491); and to a trustee in bankruptcy in Federal court(Security Warehousing Co. v. Hand, 206 U.S. 415; Thompson v.Fairbanks, 196 U.S. 516; York Mfg. Co. v. Cassell, 201 U.S. 344).

With this question out of the way, a simple statement of the proposition is whether the drawing and delivery of a draft to the payee amounts to an equitable assignment while the draft remains in the hands of the payee, the drawer becoming insolvent; and the funds from the drawee bank at the time of trial are in court in the hands of the receiver of the drawer. At least until the adoption of the Negotiable Instrument Law, this court was committed to the rule that the making and delivery of a draft was a pro tanto assignment of the funds in the hands of the drawee bank. The first discussion of the question was in the case ofRoberts v. Austin Corbin Co., 26 Iowa 315; Schollmier v.Schoendelen, 78 Iowa 426; May v. Jones, 87 Iowa 188; Poole,Gilliam Co. v. Carhart, 71 Iowa 37; Thomas v. Exchange Bank,99 Iowa 202; Percival v. Strathman Beh, 112 Iowa 747; Bloom v.Winthrop St. Bank, 121 Iowa 101; Kuhnes v. Cahill, 128 Iowa 594;State v. Gibson, 132 Iowa 53; Hove v. Stanhope St. Bank, 138 Iowa 39. The majority opinion recognizes this fact, and says that the court is no longer disposed to adhere to this rule, because of the adoption by this state of the Uniform Negotiable Instrument Act. Section 9650, Code of 1924, reads as follows:

"A check of itself does not operate as an assignment of any part of the funds to the credit of the drawer with the bank, and the bank is not liable to the holder, unless and until it accepts or certifies the check."

The majority opinion quotes from Hove v. Stanhope St. Bank, supra, as follows:

"For the purposes of this case, however, it may be conceded that, in so far as law actions are concerned, the statute referred to should be held to take the place of previous decisions of this court."

That case further says, however, quoting from Dillman v.Carlin, 105 Wis. 14 (80 N.W. 932):

"* * * if by any means the parties interested are brought into a court of equity while the bank is yet the debtor, and can be protected against paying the debt twice, and it stands indifferent as to who gets the money, so long as it is protected, the check holder will be preferred to the drawer or any subsequent claimant, whether by assignment of the drawer, or by legal process served upon the drawee."

The opinion proceeds:

"And we see no reason why the rule should not be applied by courts of equity to cases like the present. Giving to the section of the Code under consideration its full force and effect in law actions, we are of the opinion that, where the parties are properly in court in an equitable action, and where it is shown that the power intended to assign the entire fund is a part thereof, the rule of the cases heretofore referred to should govern, and a party holding such assignment of a fund on general deposit should be protected, as against subsequent claimants at least."

The case of Kaesemeyer v. Smith, 22 Idaho 1 (123 P. 943), cited in the majority opinion, is not a case where the contention is between the drawer and the payee of the draft. In that case the check was drawn and delivered, but a garnishment was served on the bank before the check was presented.

In Cook v. Lewis, 172 Ill. App. 518 (1912), Lewis received a check from the plaintiff's decedent, and cashed the same at the bank after the death of the maker of the check. Suit was brought by the administrator, to recover the amount collected. The case turned wholly on the proposition that the death of the drawer of the check revoked the right of the bank to pay; and while the Negotiable Instrument Statute, which is similar to ours, is discussed, the case is made to turn wholly on the right of the bank to pay after the death of the maker.

In First Nat. Bank v. Hargis Com. Bank Tr. Co., 170 Ky. 690 (186 S.W. 471), and Elyria Sav. Bank. Co. v. Walker Bin Co.,92 Ohio St. 406 (111 N.E. 147) (analogous to this case is our case of In re Estate of Knapp, 197 Iowa 166), the action was brought by the holder of the check against the bank, which had refused to pay. Neither one is a case affecting the narrow question we have as to the rights between the drawer and the payee of the check or draft.

In the case of Murray v. American Sav. Bank, 197 Iowa 318, what is said with reference to the Negotiable Instrument Law is dictum, as the case was determined on a wholly different basis. Further than that, the drawee bank was defeated in the court below, in spite of the protection provided by the section of the Negotiable Instrument Act under consideration.

As to the case of Roberts v. Austin Corbin Co., supra, the majority opinion, of course, squarely overrules what is said in that case. It is to be noted that this case determines the matter on a purely equitable basis, all parties and the money being in court, regardless of whether or not it amounts to a pro tanto assignment. This is a correct expression of my contention in this case.

One other Iowa case deserves attention: In the case of McClain Norvet v. Torkelson, 187 Iowa 202, in speaking of the Negotiable Instrument Act, the force and effect of this section of the statute was under discussion, and, after a very elaborate review of the authorities, we there held that, in spite of this section, as against a garnishee there was an assignment of the fund, and the rights of the holders of the checks were superior to those acquired under the garnishment. The Torkelson case is overruled in the majority opinion. I do not now stop to discuss this question, because, while there is much that is said in theTorkelson case that is favorable to my view, at the same time third parties are involved therein, and hence, whatever the rule may be in cases where third parties are involved, I want to limit my discussion to the case at hand. So far, I have given attention to the matters referred to in the majority opinion.

II. I am not able to convince myself that the question involved herein is in any manner affected by or controlled by the Negotiable Instrument Law. It seems to me that the making and delivery of a draft to the payee, while the same remains in his hands and unnegotiated, make a simple contract between the parties, which should be controlled by the general law of contracts, and not by the Negotiable Instrument Law. The parent of the Negotiable Instrument Law, the Law Merchant, as I understand it, came into being for the purpose of making liquid what we now call, in general terms, "commercial paper," and every purpose and intention of the law had to do with such paper when it was once negotiated and passed into circulation. I do not understand that it ever did or was intended to in any way affect or control such paper while it was still in the hands of the original payee. If I am correct in this notion, then these drafts in the hands of the payee were simple contracts, in no way affected by the Negotiable Instrument Law. It has been held that in a suit by the payee it was not important whether the instrument was negotiable or nonnegotiable. Cherry v. Sprague, 187 Mass. 113 (72 N.E. 456).

It was held in Reed v. Murphy, 1 Ga. 236, that, even though the instrument is without negotiability, it is enforcible as a common-law contract. We have said in the case of Fullerton Lbr.Co. v. Snouffer, 139 Iowa 176, that negotiability is not necessary to validity. What difference does it make, between the two original parties, whether the instrument is negotiable or nonnegotiable, so far as their respective rights are concerned as against each other? I am sure that my brethren and I would have no difficulty on this proposition in event that the instrument were nonnegotiable. No one would contend, under such circumstances, that it was controlled by the Negotiable Instrument Law; and, as this instrument never was negotiated, my opinion is that, never having passed into the field of commerce, it is not affected or controlled by the Negotiable Instrument Law.

But, assuming that I am in error in this respect, I am then confronted with the provisions of the above quoted section of the statute.

We said in the Hove case, supra, in discussing the force and effect of this section of the statute:

"This section was undoubtedly enacted for the purpose of protecting banks against losses which might be occasioned by the double payment of checks on general deposit; and its only intent and purpose is undoubtedly to protect banks only when they are acting in good faith, and without any attempt to assist particular persons in the collection of their debts, to the exclusion of others, who are equally as much entitled to protection."

The court, in its majority opinion, of course overrules this doctrine. I think it is logical, and is a correct statement of the purpose of this section of the statute.

In Elgin v. Gross-Kelly Co., 20 N.M. 450 (150 P. 922, at 925), discussing this question, the court said:

"This contention arises by virtue of some confusion as to Section 189 of the Negotiable Instruments Act [which is identical with the Iowa Act], which, while providing that a check of itself does not operate as an assignment of any part of the funds to the credit of the drawer, is clearly designed for the protection of the bank, rather than a provision affecting the relation between the maker of the check and the payee. This is borne out by the fact that the latter portion of the section provides that the bank is not liable to the holder unless and until it accepts or certifies the check."

We find this conclusion supported by Mr. Daniel in his work on Negotiable Instruments, 1852, Section 1643, Vol. 2 (6th Ed.), where he says:

"The provision of the statute [referring to the Negotiable Instrument Statute] that a check of itself does not operate as an assignment of any part of the funds to the credit of the drawer with the bank, is a declaration of the rule that, as against a drawee bank, a check is not an assignment of the fund. But, as against the drawer, the giving of a check for value on an ordinary bank deposit should be considered an assignment of the fund pro tanto."

As supporting that decision, the New Mexico court cites our case of Hove v. Stanhope St. Bank, supra.

We have reannounced this doctrine, that the section in question was for the protection of the bank only, in the cases of Cable v.Iowa St. Sav. Bank, 197 Iowa 393, at 403; and Thomas v. ExchangeBank, 99 Iowa 202. See, also, Dunlap v. Commercial Nat. Bank,50 Cal. App. 476 (195 P. 688).

Assuming, therefore, that the Negotiable Instrument Law is not controlling in the situation before us, we are of the notion that the general doctrine of equitable assignment is applicable to this situation. With both parties and the funds before the court, as said in the Corbin case, in equity should the drawer or the drawee be entitled to the fund?

As sustaining the proposition that, as between the parties, the drawing and delivery of a draft to the payee constitute an equitable assignment, see Federal Reserve Bank of St. Louis v.Millspaugh (Mo.), 282 S.W. 706; Federal Reserve Bank v. Peters, 139 Va. 45 (123 S.E. 379); Raesser v. National Exch.Bank, 112 Wis. 591 (88 N.W. 618); Hawes v. Blackwell,107 N.C. 196 (22 Am. St. 870); Hulings v. Hulings Lbr. Co., 38 W. Va. 351 (18 S.E. 620); Columbia Nat. Bank v. German Nat. Bank,56 Neb. 803 (77 N.W. 346); Schuler v. Laclede Bank, 27 Fed. 424; In reBrown, 2 Story (U.S.C.C.) 502; Morrison v. Bailey, 5 Ohio St. 13;Bell v. Alexander, 21 Gratt. (Va.) 1; Munn v. Burch, 25 Ill. 35;Fogarties Stillman v. State Bank, 12 Rich. (S.C. Law) 518;Whitehouse v. Whitehouse, 90 Me. 468 (60 Am. St. 278); IndustrialTr. T. Sav. Co. v. Weakley, 103 Ala. 458 (49 Am. St. 45);Northern Trust Co. v. Rogers, 60 Minn. 208 (51 Am. St. 526);Dillman v. Carlin, 105 Wis. 14 (80 N.W. 932); Farrington v.Fleming Com. Co., 94 Neb. 108 (142 N.W. 297); Elgin v.Gross-Kelly Co., 20 N.M. 450 (150 P. 922).

To elaborate a little further, to my mind, in a situation of this kind, in equity between drawer and the payee, with the funds in court, a pro tanto share of the fund is appropriated by the very drawing and delivery of the instrument. The very words "equitable assignment" are used because the assignment is recognized only in courts of equity, not in courts of law. If it were recognized in a court of law, it could be enforced there, and we would never have heard of any such words as "equitable assignment." Therefore, it is an assignment of that much of the debt which a court of equity will recognize and a court of law will not. The philosophy of the matter is that this fund has been appropriated by these drafts, and it did not pass to the receiver by reason of his appointment and the authority conferred upon by him by law thereunder, but, when he received it, he held it subject to the equities outstanding against it. It is an equitable ground, warranting the court in ordering so much of the fund paid to the holder of the instrument as is called for on its face. Another thought is the very fact that the drawer is insolvent, and the payee must lose. It is an equitable circumstance. In other words, the drawing bank received this money in the first instance, and now, under the holding of the majority opinion, it is entitled to hold an equivalent amount, without delivering to the purchaser of the draft any consideration whatever.

In 5 Corpus Juris 848, it is said:

"At an early day, courts of equity disregarded the common-law rule against the assignment of choses in action. There thus arose what is termed an ``equitable assignment,' which operated to give the assignee a title that, although not cognizable at law, equity will recognize and protect; and such assignments are enforced in equity, when they are made bona fide for a valuable consideration."

It is in the nature of a declaration of trust, and its foundation is in the principles of natural justice and essential fairness, without regard to form. To work such an assignment, there must be an actual or constructive appropriation of the fund or debt, coupled with an intention on the part of the assignor to transfer the personal interest in the fund or debt; and if these elements exist, an equitable assignment is thereby created.

In 3 Pomeroy's Equity Jurisprudence, Section 1280, the author lays down the rule that a sure criterion is whether the transaction between the parties, if assented to by the debtor of such alleged assignor, creates an absolute present indebtedness payable by him to such alleged assignee, or whether it creates merely an obligation by such assignor to make payment out of that particular debt. If the former, an equitable property in the debt, and not a mere right of action as against such primary debtor, passes to such assignee, and an equitable assignment is effected.

Time forbids that I should pursue this subject further; but, in view of the fact that the majority opinion overrules the well established principle in this state for which I am contending, and which has been decided in some twenty different cases both before and after the passage of the Negotiable Instrument Law, I feel warranted in noting this dissent. I can see no harm, and much good, to come from a recognition of this doctrine of equitable assignment in this character of cases, as it appeals to one's sense of actual justice and fairness, in that the payee of the check has parted with his money, and received no return whatever therefor. It is my idea that he does not become entitled to recognition as a depositor, under the present statute, but, if he has any right at all in the insolvent estate, he will stand only in the shoes of a general creditor, under our statutes as they now stand; and it is a well-known fact that none of the insolvent banks paid the depositors in full, to say nothing of any dividend to general creditors. By such a rule we would not be impinging on the Negotiable Instrument Law, and we would not be creating differences in the interpretation of the same among the different states.

Up to this time, we have consistently held that a check against the fund in a bank would take priority over a garnishment of the bank. Kuhnes v. Cahill, 128 Iowa 594; Dolph v. Cross, 153 Iowa 289; McClain Norvet v. Torkelson, 187 Iowa 202. We have also held, up to this time, that the holder of a check might bring an action against the drawee bank. Roberts v. Austin Corbin Co.,26 Iowa 315; Schollmier v. Schoendelen, 78 Iowa 426; May v.Jones, 87 Iowa 188; Thomas v. Exchange Bank, 99 Iowa 202;Percival v. Strathman Beh, 112 Iowa 747; Bloom v. Winthrop St.Bank, 121 Iowa 101. Also, that, if a check is not presented within a reasonable time, and thereby a loss occurs by reason of the drawee bank's becoming insolvent, such loss must fall on the check holder. Northern Lbr. Co. v. Clausen, 201 Iowa 701; Knaussv. Aleck, 202 Iowa 91. If the majority opinion is right, then both of these opinions are erroneous.

The rule as above pronounced by the majority means a total change of front and an overruling of each and all of the above cited cases. I think the holding in this case should have been exactly the reverse of the majority opinion.

MORLING, J., joins in this dissent.