Hatch v. Fourth National Bank

[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.]

[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] We ought to affirm this judgment upon a single ground, which rests upon facts not at all controverted or in dispute. For that purpose we may assume, as true, the plaintiff's version of what actually occurred, without criticism at doubtful points of the way. She was the owner of a certificate of stock of the Adams Express Company, of the par value of fifteen thousand dollars. That certificate, in a negotiable form and capable of transfer by delivery, she intrusted to the temporary custody of Mills, Robeson Smith. Her son and agent, E.S. Sanford, placed it in a sealed envelope, marking it on the outside with his name, and left it with the firm to be placed in their safe until the following Monday. On the day of that deposit, the firm, acting through Smith, borrowed of Ferris Kimball the sum of twenty thousand dollars, giving the note of the partnership therefor, and depositing as collateral the certificate which the plaintiff had committed to the care of the firm, and which Smith converted to its use. We may admit that his act was, in substance, a larceny, and the certificate in his hands stolen property, but, nevertheless, the title of Ferris Kimball to the pledged certificate which they sold upon default in the payment of the loan, and to the proceeds of such sale, is not here and now questioned or assailed. The plaintiff's certificate was but a part of the collateral which stood as security for the note. It is found that eight shares of Chicago, Cincinnati, Cleveland and St. Louis preferred stock, raised by a forgery to eighty shares, and two Union Pacific first mortgage bonds of one thousand dollars each, also formed part of the collateral. The lenders gave their check for the twenty thousand dollars thus borrowed to Mills, Robeson Smith, and they indorsed it and deposited it to their own credit in the Fourth National Bank. That bank held the deposit upon an express contract with its customer, which gave to it rights beyond those flowing from the ordinary relation, and outside of the mere banker's lien. The deposit was made on the afternoon of November 14th, 1890. Previous to that date Mills, Robeson Smith had borrowed of the bank, first the sum of fifty thousand dollars, and next the sum of five thousand dollars, giving in each case their note, payable on demand, and certain collateral securities. The special agreement between the parties added to such collateral any balance of the customer's deposit accounts standing to their credit on the books of the bank, and contained the following explicit provision: "The undersigned do hereby authorize and empower the said bank at its option, at any time, to appropriate and apply to the payment of the above-named obligations or liabilities, whether now existing or hereafter contracted, any and all moneys now or hereafter in the hands of the said bank, on deposit or otherwise, to the credit of or belonging to the undersigned, whether the said obligations or liabilities are then due or not due." On November 15, 1890, the balance standing to the credit of the firm was a little more than sixteen thousand dollars. On that day Mills, Robeson Smith failed and made a general assignment. On November 17th, which was the next business day thereafter, the bank demanded payment of the loan, and in default thereof applied the credit balance of the firm to the payment of its debt, thereby so far canceling and extinguishing that liability. This act the plaintiff resists, contending that the sixteen thousand dollars was her money as proceeds of her stock stolen from her by Smith, and which proceeds she was able to trace into the thief's deposit account and sufficiently identify as her own money. There is more or less of difficulty in that identification, and the subject has occasioned a large part of the argument addressed to us, but need not now be discussed. For the purposes of the decision, at least until we reach the case of Mrs. Crabb, we may concede that the credit balance was proceeds of the stolen stock and sufficiently identified, and yet the opinion of the General Term will remain intact and unanswered.

If Mills, Robeson Smith, on receiving the check of Ferris Kimball, had at once collected it and turned it into money, and then had paid that money to the bank in discharge of their debt to it, and the bank had accepted that payment in ignorance of the source from which the money had been derived, and had surrendered the notes and discharged their debtors' liability in entire good faith, the owner of the stolen money would have had no right of recovery against the bank. (Justh v. Bank, 56 N.Y. 478;Stephens v. Board of Education, 79 id. 183.) This doctrine goes upon the ground that money has no earmark; that in general it cannot be identified as chattels may be, and that to permit in every case of the payment of a debt an inquiry as to the source from which the debtor derived the money, and a recovery if shown to have been dishonestly acquired, would disorganize all business operations and entail an amount of risk and uncertainty which no enterprise could bear. The rule is founded upon a sound general policy as well as upon that principle of justice which determines as between innocent parties upon whom the loss should fall under the existing circumstances. If, therefore, Smith had come with the money, and with it had paid his debt over the counter, the amount could not have been recovered by the plaintiff, although admitted to have been actual proceeds of the stolen certificate. I think the situation was not at all changed because the debtor came with Ferris Kimball's check which the bank collected. If Smith had brought that and the bank had accepted it as cash or conditionally, upon its proving good, the result would have been the same. The debt would have been paid and the money become the absolute property of the bank. In Goshen National Bank v. TheState (141 N.Y. 379) it was a draft which paid the debt and which the comptroller received and collected. Nor does it change the result that Smith deposited the check and did not at the moment direct its application upon the liability of the firm. He made the deposit under an existing specific contract by which Mills, Robeson Smith consented and agreed that the bank might at any time apply it upon the existing liability. When it did so on the 17th of the month it acted with the written consent and authority of the firm, as completely effectual and operative as if the debtors on that day had personally directed the application to be made. The contract was a continuing direction, a daily consent, an agreed permission. The loan was a call loan, payment of which could be demanded on any day, and the option to make that demand and apply the credit balance was a part of the written agreement, and an essential and material stipulation of the contract of loan. I think the application of the deposit account upon the debt, resting upon that continuing consent, had the same effect as if Mills, Robeson Smith, without an assignment, had personally on that day directed the application, and so paid the debt. As against them and as against their assignee the application was in all respects lawful and effectual.

The recent case of American Sugar Refining Co. v. Fancher (145 N.Y. 552), which is pressed upon our attention, does not at all determine the present question. There the proceeds of the sugars obtained by fraud, remained in the hands of the insolvent's assignee without having been applied to the payment of debts. If the insolvent himself had applied those proceeds to some existing liability, or his assignee innocently and without notice had so paid them out, and the fund was sought to be wrested from the hands of the creditor paid, a very different question would have been raised, and one requiring a different solution.

Nor does the case of Van Alen v. American Nat. Bank (52 N.Y. 1) govern the one before us. There was there no claim by the bank upon the fund deposited. Concededly, they were bound to pay it over to the proper party, and the only question involved was who that proper party in truth was. The depositor was an agent, the deposit the money of his principal, impressed with a trust in favor of that principal, and the inquiry addressed to the court was whether the principal, for lack of privity, could enforce payment of the deposit to himself.

The rule we have applied is further resisted upon the ground that the application of the credit balance was made after the debtor's failure and assignment, and with knowledge of that fact on the part of the bank. The inference sought to be drawn is that the payment was not in good faith, but under circumstances sufficient at least to put the bank on inquiry. But business embarrassment or a general assignment does not warrant or suggest a presumption of fraud; and certainly not of a theft producing moneys on deposit. The fact of the failure undoubtedly led to a call of the loan and a resort to the contract right. It was just such an emergency that the agreement was framed to meet and against which it was to serve as a protection. The fact of the failure had not the least tendency to indicate that the deposit balance was the product of a larceny.

The further question in the case is over the right of Mrs. Crabb, which has been sustained. After the failure the whole credit balance of Mills, Robeson and Smith was first applied to the debt due to the bank. It was not enough to pay that debt. When it was wholly exhausted, so that no surplus was left, there still remained a sum due to the bank. Thereupon it resorted to its collateral, as it had a right to do. Among the securities pledged by the debtor firm were some belonging to Mrs. Crabb, which she had deposited for safe-keeping, and which Smith had appropriated for collateral. To these pledged securities the bank resorted, and sold most of them after the failure and after the credit balance had been fully exhausted. The result of that sale produced a surplus after completed payment of the bank's debt. The proceeds were credited by the bank after payment of their debt in full to the deposit account, and that surplus has been awarded to Mrs. Crabb. Obviously, no part of it could be said to be proceeds of plaintiff's stock. Those proceeds had been previously applied in payment of the bank debt and utterly exhausted. What remained was the collateral, and that produced the surplus, and such surplus was clearly the product of Mrs. Crabb's bonds, together with what is conceded to have been Fay's.

The judgment should be affirmed, with costs.

All concur.

Judgment affirmed.