CITIZENS' BANK & TRUST CO. v. THORNTON et al., 174 F. 752

JONES, District Judge (after stating the facts as above). The Buckmaster and Williams note reads as follows: “$5,000.00 ’ Attalla, Ala., April 14th, 1906. “On the 12th of August, 1906. fixed, I, we, or either of us, promise to pay to L. M. Dyke, or order, five thousand & 00/100 dollars, value received, and with interest from maturity, negotiable and payable at tbe First National Bank of Attalla, Ala.

Maker and indorser hereby agrees to pay any and all costs of collection, of whatever nature, either of collecting or attempting to collect, securing or attempting to secure, in part or in full, and also including a reasonable attorney’s fee, if not paid at maturity. And all right to- claim any exemption under the Oonstitution and laws of this or any other -State is expressly waived by the maker and indorser of this note, and the maker and indorser also hereby waive notice of protest if not paid at maturity. “Given under our hands and seals, this 14th day of April, 1906. “Buckmaster & Williams. [L-. S.] “10.

Buckmaster. [L. S.'j” Indorsed on the back: “I,. M. Dyke.” “First National Bank of Attalla, by L. M.

Dyke, President.”’ The substance of the defense to the suit upon the note is that the appellee bank never collected the note or received any benefit whatever from it, that the indorsement was an accommodation indorsement by the president without authority, and was ultra vires, and that the transaction was an individual matter of its president, and it is further insisted, if the appellee be liable, that the indorsement on the note was subsequent to the time when the collateral was pledged, and that the note was not at that time an obligation “due, or to become due,” and therefore does not fall within the terms of the pledge.

The record, under the admissions of the parties, presents three questions:

(1) Is the First National Bank of Attalla bound to the Citizens’ Bank & Trust Company for the payment of the Buckniaster and Williams note?

(2) If so, may the Citizens’ Bank & Trust Company, under the terms of the pledge of collateral to secure a prior note, have the collateral applied to the satisfaction of the Buckmaster and Williams note?

(5) If the collateral may be so applied to the satisfaction of that note, may the expense of collection and attorney’s fees be added to the sum due upon the note, and the collateral applied to the satisfaction of such expenditures, as well to the principal and interest? Plainly the note fills all the requisites of negotiable paper under the statutes of Alabama.

Ordinarily a person purchasing such a paper for value before maturity from one having it in possession, whose name is upon it, mar assume that the title of the holder, as well as the liability of all prior parties, is precisely that indicated by the paper itself. Auten v. United States National Bank. 174 U. S. 125, 19 Sup. Ct. 628. 43 L. Ed. 920.

As the appellant had the right to act upon appearances, it is'entitled to judgment, unless there he something else growing out of the relations of the parties or the nature of the transaction which charged appellant with notice of the defenses now attempted against the note in its hands. There is nothing outside the paper itself to put appellant upon notice, except that appellant knew that tlic president of the First National Bank of Attalla, who indorsed! the note in its behalf and procured its discount on its account, was also the payee of the note and indorsed it individually.

That knowledge, coupled with the face of the paper, only charged appellant with notice that the First National Bank of Attalla had discounted the paper for its president. There is nothing in the national bank act which prohibits a national bank from loaning money to one of its officers, or discounting a note payable to him, or to prevent it from rediscounting it with another bank.

These circumstances, especially where the note redis-counted is for an amount not unusually large compared with other transactions of the bank seeking the rediscount, do not indicate that the paper was not taken and disposed of in due course of business. The rediscounting by a bank of its bills receivable is not unusual in banking circles, and is of frequent occurrence in many localities.

The movement of crops at certain seasons of the year involves large use of money and creates demands for loans by local banks to their customers, far in excess of that part of its capital and deposits which a prudent bank usually keeps in cash to meet the ordinary current demands of its business. Under such conditions, a bank, however sound and honestly conducted, must either refuse to accommodate its customers, and lose their business or else borrow money temporarily to lend them..

In this case, according to all appearances, appellant was justified in assuming that the appellee bank had. met such exigency by rediscounting its bills receivable. There was nothing in any of the facts known to appellant which charged it with any duty to inquire into the history of the negotiable paper, or to put it on notice of any defense which might be available against ■the paper in the hands of any of the original holders. Rooking, however, to the actual case as the proof presents it, the right of recovery against the appellee is still stronger.

Appellant, before the note in suit was given, had been the correspondent both .of the Bank of Attalla and of the First National Bank of Attalla, which took over most of the business of the former bank. Dyke as president conducted the business of his bank with the appellant, and was often borrowing money from it for his bank, and paying these loans as they matured, and having settlements with the appellant.

Dyke, speaking for the appellee bank, frequently advised appellant of the business conditions which made it desirable for his bank to obtain loans and discounts, detailing the sources from which the loans and discounted notes would be paid, g'oing into particulars as to .the value of the papers offered, the original Buckmaster and Williams note being one-of them, and representing all the while that the bank was strengthening its financial position.

If appellant had entertained suspicion of any sort, the conduct of the appellee bank •would have disarmed it, and naturally lead appellant to believe that matters were exactly as Dyke represented them to be.

The appellee having left its affairs to be conducted by its president, and his conduct being within the range of the authority customarily intrusted to such an officer, it is bound to one who has parted with his money, in good faith in reliance upon his exercise of authority, whatever might be the limitations which the by-laws or the resolutions of the directors, in fact, put upon Dyke’s authority in the premises, so long as appellant was not informed of them. Case v. Bank, 100 U. S. 446-455, 25 L. Ed. 695.

Moreover, the appellee, when it sent the first Buckmaster and Williams note to the appellant for rediscount, informed appellant that the business of the Bank of Attalla would soon be merged into that of the First National Bank of Attalla, and that it would assume any outstanding liability of the Bank of Attalla. Dyke testified that the statements in his letters to his correspondent were true. Although examined about other matters, he did not mention any dealings with the appellant on his own account, or claim to have had any.

Its .officers testified positively that he never had any personal account ■with appellant. When the original Buckmaster and Williams note was discounted for the Bank of Attalla, the proceeds thereof, $4,850, were pláced to its credit, and its accounts, in which said credit was in■cluded, were afterwards merged in the account of the First National Bank .of Attalla, which itself had the actual benefit of that credit in subsequent settlements it,-had- -yvith its correspondent, and with full knowledge of tile facts, appellee received and retained the money paid by appellant on the discount oí that note.

It could not repudiate the transaction, and at the same time retain its benefits. Besides, it assumed the outstanding obligations of the Batik of Attalla, and was bound to provide for them. When, therefore, it indorsed the new Buckmaster and Williams note, the one in suit, it was simply indorsing the paper in renewal of its own debt. ■ Appellee was also bound by its indorsement of the note in suit for another reason. Appellee was appellant’s banking correspondent. The old paper, payable at appellee's bank, was sent by appellant to appellee for collection.

It was appellee’s duty to collect it in money, or, if it could not do that, to return it. It did neither, it returned appellee a new note of the same parlies, asking that it be received in renewal of the old paper. The appellant declined the arrangement, and returned the new note, insisting upon appellee’s indorsement upon it. Appellee returned the new .paper with its indorsement, stating that its failure to indorse it ivas an “oversight.” The new note was then accepted by appellant and the old debt thereby extended.

Under the circumstances, there was abundant consideration for appellee’s indorsement of the new note in suit, and appellant took the negotiable paper in due course of business, and became a holder for value. Muirhead v. Kirkpatrick, 21 Pa. 237; Railroad Company v. National Bank, 102 U. S. 14, 26 L. Ed. 61; Oates v. National Bank, 100 U. S. 239, 25 L. Ed. 580.

Property in a thing involves the right of the owner to deposit or pledge that thing with another person to secure any obligation or to provide for any undertaking of the owner upon such terms and conditions, and for such purposes as he may see fit, so long as the pledge or deposit is not tainted with a purpose to accomplish a result forbidden by law, or contrary to its declared policy. Plainly, when the $10,000 loan was made for which the collateral was primarily pledged, appellee and appellant did not contemplate it would be the only transaction of the kind.

On the contrary, it is evident from their relations and dealings they contemplated that the customer then pledging the collateral might obtain further credit or make other loans, and both of them had it in mind that the collateral deposited for the security of the particular debt should, in that event, stand pledged to secure any other indebtedness in future dealings. The language of the pledge is not only consistent with this view, but inevitably excludes any intention to restrict the pledge to the indebtedness then existing.

It is the duty of the courts to construe and enforce pledges‘according to the intent of the parties as gathered from the instrument of pledge or deposit, and the subject-matter and course of dealing to which it relates.

The words are emphatic — “To secure the payment of this or any other obligation to said bank.” Not content with this, the words are added: “Due or to become due.” Provision is made, not only for the application of the collateral in satisfaction of the particular obligation, but for its application as well, if any surplus remained, “to any other obligation, bill, overdraft, or open account, upon which the owner shall be in any way bound, primarily or secondarily, absolutely or contingently, due or to become •due.” This explicit language is used regarding the disposition of collateral, which at the time the agreement was entered into could only take place in the future, and inevitably extends the pledge to-“any other note or obligation due or to become due.” Apter language could not be used to convey the intent to pledge the collateral for the protection of “any other debt” the pledgor might contract thereafter.

The original Buckmaster and Williams note, which the parties recognized as one of the debts for which appellee was liable, was outstanding at the time the deposit of collateral was made. By its express terms the pledge secured “any other debt due or to become due.” The renewal of the old Buckmaster and Williams debt by giving a new note would not release or destroy the pledge as a security for the debt, or deprive the debt, in its new form, of the benefit of that pledge.

We cannot doubt that the collateral in. the hands of the receiver is subject, under the terms of the pledge, to" the satisfaction of the principal and interest due upon the Buckmaster and Williams note in suit. Selma Bridge Co. v. Harris, 132 Ala. 179, 31 South. 508; Merchants’ Bank v. Hall, 83 N. Y. 338, 38 Am. Rep. 434; Hallowell v. Blackstone National Bank, 154 Mass. 359, 28 N. E. 281, 13 L. R. A. 315.

Notwithstanding the provision in the note — “that the maker and in-dorser hereby agrees to pay any and all costs of collection of whatever nature, either of collecting or attempting to collect, securing or attempting to secure, in part or in full, and also including a reasonable attorney’s fee, if not paid at maturity” — we are of opinion under the facts of this case that the collateral in the hands of the receiver cannot be applied in satisfaction of such disbursements, nor can the amount be tacked onto the original debt in order to swell the proportionate amount upon which the creditor shall receive dividends.

A national bank is an instrumentality of the government, whose administration is vested in the Comptroller of the Currency, who, in case of insolvency, appoints a receiver and directs his acts. The statutes provide a complete system for the administration of the assets of an insolvent bank, which are trust funds in the hands of the Comptroller. Their purpose is to put upon him the duty of getting in the assets and paying therefrom, ratably all the just claims against the insolvent bank, according to their priorities and equities.

The statutes do not contemplate that the assets in his hands are to be charged with the expense of creditors in establishing the validity of their claims, otherwise than as the general law allows them to be taxed in their favor, as in the case of other successful suitors, and then such costs are a part of the general expense of administration, which is to be deducted from the assets before dividends are declared.

If a creditor’s claim is disallowed, the law opens the court to the dissatisfied creditor to establish his claim, notwithstanding the insolvency and that the assets are being administered by the receiver. But beyond this, save to prevent improper diversion of funds applicable to the particular debt and the like, the courts cannot control the receiver in the administration of the assets.

It would defeat the policy of the statutes to enforce a contract by an insolvent bank and its creditor, whereby it is-agreed, if a note be not paid at maturity, and the owner of the debt goes to expense in “collecting or attempting to collect” and brings suit, tliaf the amount of such expense and attorney's fees shall be added to the real debh and correspondingly swell the dividend to be declared out of the insolvent estate in favor of such creditor, necessarily to that extent prejudicing other creditors.

It would give the particular creditor power to displace the general law as to costs, which, when the receiver is sued by a creditor to establish a rejected claim, is part of the system oí winding up insolvent banks, and substitute for it a provision that whatever the nature of the expense or the amount spent in litigating his debt the creditor shall recover it as part of the costs to be paid out of the assets of the insolvent bank, and, if the claim itself he a preferred one, that such costs and expenses shall also he a preferred claim against the estate.

Every creditor who-takes a note with provisions like this is charged with knowledge of the law providing for the administration and settlement of the affairs of an insolvent hank that it enters into his contract, and that it does not contemplate that the creditor who litigates the settlement of his claim with the receiver shall be reimbursed out of the trust-funds beyond the statutory costs for his expenses in getting his claim allowed and paid.

Besides, the contingency upon which the expense of collection and attorney's fees are to become dtte is that the note he “not paid at maturity.” The contingency upon which the debt is to be increased by the addition of expenses and attorney’s fees had not occurred when the insolvent bank was placed in the hands of a receiver; for the note was not then dne. When it matured, the in solvent bank was in process of administration, and the payment of the claims of the creditors was necessarily delayed for investigation, the getting in of assets, and the declaration of dividends for ratable distribution to creditors.

The bank itself was disabled by the act of law from paying out anything or meeting the note at maturity. Under these circumstances, to increase the debt of a particular litigant by the addition of attorney’s fees and the expense of “attempting to collect” simply because he has so contracted, is, in effect, whatever it may be technically, the visitation of a penalty upon other creditors to the extent that the amount allowed the particular creditor for such disbursements diminishes the dividends, which otherwise must be based ratably upon the real indebtedness of the insolvent debtor.

Whatever may be the rights of the parties under a note of this kind as to reimbursement for attorney’s fees and expenses when suit is brought, or effort made to collect, before the insolvent hank is placed in the hands of a receiver, we are of opinion, where the note did not mature, and suit was not brought or effort made to collect, until the insolvent hank was taken iti charge by the receiver for the. purpose of liquidation, that the agreement should not be enforced by a court of equity.

So long as the debtor is not insolvent, it is no concern of other creditors what the creditor may agree to pay another creditor if he does not meet a note at maturity; but when the agreement attaches other than the ordinary legal consequences of the reim • bursement of principal and interest, and the costs of litigation as allowed and taxed in the courts, on failure to pay at maturity, other creditors whose share in a trust fund is diminished thereby have, the right to complain of an effort thus to change the law of costs in the administration of that fund..

Agreements of the kind here* must be construed as intended to apply to ordinary suits brought against the bank while it is a going concern and in charge of its affairs. Complainant is in a court of equity, asking equity, and it must do equity.

As it is admitted that the other claims of appellant have been settled and paid by the receiver in full, and that there remains in his hands a sufficient sum arising from the collection of collateral deposited 'to secure the payment of appellee’s note of February 28, 190G, which collateral appellant surrendered to the receiver without prejudice to its rights, and- as we have reached the conclusion that the proceeds of the collateral must be applied in satisfaction of the Buckmaster and Williams note, the decree of the Circuit Court must be reversed; and a decree entered -that the complainant’s claim, as evidenced by the Buckmaster and Williams note, be allowed for the principal of said note and interest at the rate of 8 per centum per annum, and that the receiver certify such allowance to the Comptroller, the amount thereof to be paid out of the funds in the hands of the receiver arising from the collections on the collateral.

The decree appealed from is reversed, and .the cause is remanded to the Circuit Court, with instructions to enter a decree in accordance with the views herein expressed, and otherwise proceed as equity may require.