Mechanics & Traders Bank v. Seitz Bros. ( 1892 )

Opinion by

Me. Justice Williams,

The defendants are brewers in the city of Easton. In February, 1890, they bought from the New Process Ice and Refrigerating Co. a refrigerating machine for use in their business. In the following June they gave in part payment for the machine their negotiable note for fifteen hundred dollars, payable at the First National Bank of Easton at ninety days. The company transferred this note, a day or two after it was given, to its president, J. J. Hayes, in consideration of his payment of bills, then maturing, to an amount equal to or greater than the note. He soon after indorsed the note to the plaintiff’s bank which discounted it, placing the proceeds to his credit. The bank thus became the owner of the note in the usual course pf business, for full value, before maturity, and without notice of any equities between the maker and the paj'ee, if any such existed. When it fell due it was sent to the bank at which it was payable for collection. It was not paid, and was returned to the holder duly protested. Upon this state of facts, the maker, the payee and the indorser, were severally liable to the bank, and were liable to each other in the order in which their names stood as parties to the instrument.

Hayes kept an account at the bank, and when the note was returned protested, the balance in his favor was sufficient to cover the' amount due upon it. A clerk, in accordance with what he considered a business habit, charged the note up to Hayes’s account on the books of the bank; but when this fact came to the notice of the cashier, he told the clerk that this was not as they intended, and directed him to correct his act by crediting Hayes with the same amount so as to leave his account to stand as before.

The bank then brought this suit against the makers. They allege they have a defence against the payee, and to deprive the plaintiff of its position as a holder in due course of business and before maturity, they contend that it was the duty of fhe bank to charge up the note against the balance due to Hayes, and that the existence of this balance was payment in law.

They further contend that, at all events, the act of the clerk in charging up the note was payment in fact that divested the title of the bank; and that the subsequent credit, made under the direction of the cashier, is not to be treated as the correction of a mistake, but a new purchase of the note, made after protest, and subject to the duty to inquire, which the law imposes on the purchaser of overdue and dishonored paper.

It is practically conceded, and it is clear upon the facts as they are presented to us, that, unless the defendant’s theory can be sustained, they cannot defend successfully in this case. The bank, if a holder for value in the ordinary course of business before maturity, is not subject to the equities growing out of the sale of the refrigerating machine ; and must recover on its title as the holder. We come, then, to inquire what was the duty of the bank in regard to the deposit standing to the credit of Hayes ? The general rule is well settled that, while the bank may appropriate funds in its hands belonging to any previous party to the note, to the payment of it, when payment is not made at the time and place named, yet it is not bound to do so. The note may be treated as, in effect, an order or check authorizing the bank to apply the deposit to the payment, but the deposit is not payment in law. Even as between the bank and the maker, the bank is not bound to make the application, but may take the risk of its ability to collect from him and allow him to withdraw his deposit: Morse on Banks and Banking, 559. But where the bank holds funds of the maker when the note matures, it is bound to consider the interests of the indorsers or sureties, and if it allows the maker to withdraw his funds after protest, and the indorsers are losers thereby, the bank is liable to them : Commercial National Bank v. Henniger, 105 Pa. 496 ; German National Bank v. Foreman, 188 Pa. 474. The reason of this rule is, that the maker is the principal debtor, and liable to all the indorsers, whose undertaking is to pay if he does not. If the holder surrenders the money or securities of the maker, he parts with that in which all who have a right to look to the maker for indemnity have a definite interest; and if his act inflicts loss on them he must stand, as to the money or securities surrendered, in the place of the maker. As the maker is liable to the indorser, it is very plain that he cannot require the bank to appropriate the indorser’s funds to the payment of his own note, nor complain if the bank refuses to do so. He has no business with the state of accounts between the indorser and the bank ; but it is h s duty to relieve the indorser by the payment of the note in accordance with its terms.

Nor was there any payment in fact in this case. The indorser did not authorize the application of his deposit to this note, but insisted that the bank should proceed against the makers. The bank agreed to this. The unauthorized charge made by the clerk was at once corrected by the cashier; the deposit of the indorser was left subject to his check, and the bank by this action called on the makers to make good their promise to pay. We see no reason why they should not.

The first, second, third and fourth assignments of error are sustained, also the tenth, eleventh, twelfth and thirteenth.

The judgment is reversed and a venire facias de novo awarded.