American Surety Co. v. Philippine National Bank

The defendant was incorporated by special act of the of the Philippine Legislature. Its charter provides that it shall have power:

"(a) to prescribe its by-laws.

"(b) to adopt and use a seal.

"(c) to make contracts.

"(d) to sue and be sued.

"(e) to exercise the powers granted in this Act and such incidental powers as may be necessary to carry out the business of banking, within the limitations prescribed by this Act, and

"(f) to exercise further the general powers mentioned in the Corporation Law so far as they are not inconsistent with or incompatible with the provisions of this Act."

The defendant may "carry out the business of banking," but only "within the limitations prescribed by this Act." We are not relegated for definition of what constitutes the "business of banking" to usage or custom, either in Manila or elsewhere. The statute itself carefully prescribes the limits of the banking business which this defendant may carry on. Under no possible construction do these prescribed limitations include the giving of bond or indemnity for the benefit of a client, or depositor. Though the charter does give to the defendant the "general powers mentioned in the Corporation Law," the exercise of such general powers may not be "incompatible with the provisions of this Act." The Corporation Law of the Philippine Islands was not introduced in evidence. We do not know what "general powers" are mentioned therein, but it seems clear to me that no "general power" however broadly defined in the Corporation Law could remove the limitations in regard to the transaction of banking business by this defendant contained in its own charter. If in terms such a "general power" were sufficient to include the giving of an indemnity agreement, the exercise of such power beyond the prescribed limits of the banking business which the defendant was permitted to carry on by its charter would be incompatible with the provisions of the charter.

The defendant had no power to make a contract of suretyship for the benefit of a depositor. It might do so to further its own business conducted within the limitations of its charter. (Williston on Contracts, sec. 1212.) Banks have been held upon contracts of suretyship either on the ground that they received the benefit of the transaction or that it was within its corporate powers, in Appleton v. Citizens' Central NationalBank (190 N.Y. 417; affd., 216 U.S. 196); Oklahoma CityNational Bank v. Ezzard (58 Oklahoma, 251); First NationalBank of Aiken v. Mott Iron Works (258 U.S. 240); U.S.Fidelity Co. v. First State Bank (116 Miss. 239); Norton v.Derry National Bank (61 N.H. 589); People's Bank v.Manufacturers National Bank (101 U.S. 181); Thomas v. CityNational Bank (40 Neb. 501). In all these cases the banks had a direct interest in obtaining the bond. They sought benefit in connection with a transaction within their corporate power, and they received from the other party to the contract the benefit they sought. Here, it seems to me, the case is different. The bank made the indemnity agreement to induce the plaintiff to execute its bond intended to secure the release of the sum of $127,000 deposited with the sheriff and subject to the lien of an attachment issued against the oil company. The plaintiff had notice and knowledge of the purpose of the bond. So far there is nothing to show that the defendant's indemnity agreement was for its own benefit and within its corporate powers. The money was, so far as the evidence shows, in fact the property of the oil company. When the bond made by the plaintiff was filed, the oil company received the moneys. If there were nothing else in the case, contention could hardly be made that the defendant's contract of suretyship was other than a contract for the accommodation of the oil company, the defendant's depositor. It appears, however, that when the defendant by cable from Manila authorized its New York agent to sign the indemnity contract, it also directed him to have the oil company's representative remit to Manila the fund when released. This was done. The money received by the oil company was remitted to the defendant bank at Manila and credited in the oil company's bank account. That bank account was at that time overdrawn by much more than the amount of the remittance. It is said that these circumstances are sufficient to require the trier of the facts to hold that the defendant's contract was made for its own benefit and that it received for its own benefit the moneys released from attachment as the result of the indemnity agreement.

It is true that at the time the money was remitted to the defendant bank, the account of the oil company was overdrawn. Automatically the deposit in the bank account reduced the amount of the overdraft. Here, it is urged, was benefit received by the bank. If that constituted a benefit it was so slight as to be illusory. It was not the direct result of the release of the attachment. That placed the moneys, which had been held by the sheriff, in the control of the oil company. The defendant knew that the moneys, after release by the sheriff, would be within the control of the oil company. The defendant's cable from Manila contains a direction "have Helles" (the manager of the oil company) "remit fund here when received." That is a direction to remit to Manila; it is not an express direction that the money must be remitted to the defendant bank in Manila. The oil company's manager sent the check for the moneys received to the branch of the defendant bank in New York with directions to "remit by cable immediately to the Philippine Vegetable Oil Co., Inc., Manila, Philippine Islands." For all that appears, the oil company merely used the defendant bank as the instrument by which the money of the oil company in New York could be made available to that company at its principal office in Manila. The bank received it because the oil company deposited it when it received it, in the defendant bank. While thereby the oil company's overdraft was reduced, by contract previously made with the bank the oil company had a right to overdraw its account with the defendant bank for a large amount. That, it appears, is the form in which credit is by custom extended in the Philippine Islands by banks to those who desire loans. As soon as the moneys were placed in the oil company's deposit account, a credit for similar amount thereby became available to the oil company. It did avail itself of this new credit. At the end of the month the overdrafts were larger than before the moneys were remitted to the bank. The overdrafts were still larger when the oil company became insolvent.

For many purposes the relationship between bank and depositor is that of debtor and creditor. Theoretically, the depositor owns no money, but must rely upon the bank's paying its debt. If we apply the theory consistently and for all purposes, it might be said that the remittance of moneys placed to the credit of the oil company to the same extent reduced the indebtedness of the depositor to the bank upon its overdraft, and that the indebtedness of the bank to the depositor was offset against the larger debt of the depositor to the bank. The theory may not, however, blind us to the actual facts. The practical similarity between money in bank and actual money in pocket "more or less has obliterated legal difference." (Blackstone v. Miller, 188 U.S. 189.) Here the bank did not in fact offset against the overdraft the amount of the deposit. By contract it had precluded itself from doing so. The benefit of the deposit inured to the depositor. Through the remittance the depositor gained the right to draw for similar amount, and the interest that was due from the depositor on overdrafts was correspondingly reduced during the short interval that elapsed before the depositor availed itself of its right to increase the overdraft.

In all cases which have been cited or which I have been able to find, an indemnity by a bank which has been held to come within the corporate powers of the bank has been primarily for the benefit of the bank, and in all cases in which a bank has been held liable for benefit received, the benefit has been the direct result of the ultra vires act and has been real and not illusory. No use would be served by analysing again the cases relied upon to sustain the conclusion reached in the opinion of Judge CRANE. In most respects I agree with the analysis he has made. I desire to point out only that in the case of CentralTransportation Co. v. Pullman's Car Co. (139 U.S. 24) the court while allowing recovery in that case stated that "In such case, however, the action is not maintained upon the unlawful contract, nor according to its terms; but on an implied contract of the defendant to return, or, failing to do that, to make compensation for, property or money which it has no right to retain." Here, in fact, the defendant bank has not received or retained for its own benefit any money or property. In the latest case referred to in Judge CRANE'S opinion (First National Bank of Aiken v. MottIron Works, 258 U.S. 240) the written guaranty of the contract for goods sold and delivered to third parties was made because such goods were required by the third parties in order to enable these parties to perform a building contract and to secure payments thereunder. This building contract and all payments due thereunder had previously been assigned to the bank. The bank was held liable, not for the value of the goods received by the third party, but for the payments which it secured by virtue of its assignment of the contract to it. The court pointed out, as Judge CRANE shows, that the bank is in the position of having realized the benefit to acquire which the guaranty was made, and of having realized it out of the proceeds of the goods that it induced the iron company to sell. Here it seems to me that we should be closing our eyes to the real facts if we were to hold that as matter of law the guaranty was made in order to enable the bank to acquire the more or less accidental and illusory benefit of an addition to the depositor's bank account. It is the depositor who in fact has realized the benefit.

It is also urged that since want of power on the part of the bank to execute this contract of indemnity is not apparent upon comparing the act done with the terms of the charter, but depends upon the extrinsic fact of whether it was made to secure an interest on the part of the bank or an interest of a depositor or other third party, the defense of ultra vires cannot prevail in the light of assertions made by the bank in executing the contract of indemnity. (See opinion of Judge SELDEN in Bissell v. M.S. N.I.R. Companies, 22 N.Y. 258.) A contract of indemnity was signed and executed by both the oil company and the bank upon a printed bank form of the plaintiff company. It recites: "That the suretyship is for the special benefit of the indemnitor, its property, income and earnings now owned or hereafter acquired, to which the Surety looks for its indemnity, and which the Indemnitor represents that it is specifically and beneficially interested therein."

That clause refers to indemnitor in the singular, though two parties signed as indemnitors. It is open to the construction that it refers to only one of the indemnitors. Before the indemnity agreement was made the defendant had requested the plaintiff to give the bond, not for itself, but for its depositor. It had informed the plaintiff of the fact that it was loaning large sums of money to the depositor, and it had asked the plaintiff to give the bond in reliance solely on the depositor's financial responsibility. I can find no intimation in the record that the plaintiff was in any way led to believe, except possibly through the provision of the agreement hereinbefore quoted, that the defendant bank was giving the indemnity agreement in connection with its own banking business, except in the sense that it was coming to the aid of a good customer. In view of these circumstances, I do not think that we should hold that the plaintiff might rely without further question on the ambiguous representation contained in its own printed form of contract. (Wilson v. Metropolitan Elev. Ry.Co., 120 N.Y. 145.) At least it seems to me that the trier of the fact might reach contrary conclusion.

For these reasons the judgment should be affirmed.

POUND, ANDREWS, KELLOGG and O'BRIEN, JJ., concur with CRANE, J.; LEHMAN, J., dissents in opinion in which CARDOZO, Ch. J., concurs.

Judgment accordingly.