Opinion
No. 3176.
December 10, 1936.
Appeal from the District Court of the United States for the District of Massachusetts; George C. Sweeney, Judge.
Bill in equity by the Kirstein Leather Company, Inc., against Frederick S. Deitrick, Receiver of the Federal National Bank, wherein defendant filed a counterclaim, which bill was removed to the federal court by the receiver. From a decree dismissing the bill and ordering judgment on the counterclaim, plaintiff appeals.
Decree vacated and case remanded, with instructions.
This is an appeal from a decree of February 27, 1936, of the federal District Court for Massachusetts ordering (1) the dismissal of the plaintiff's bill; and (2) that the defendant, receiver of the Federal National Bank of Boston, recover on his counterclaim the sum of $2,000, with interest from December 15, 1931, to the date thereof, with costs.
The action is a bill of equity brought in the Massachusetts state court and removed to the federal District Court by the receiver of the Federal National Bank. It was originally brought against Arthur Guy, Commissioner of Banks in Massachusetts, in charge of the Salem Trust Company since it was closed December 15, 1931; and against Frederick S. Deitrick, receiver, in possession of the Federal National Bank since it was closed on the same day. Guy, the Commissioner, did not remove the action as to him.
By the bill the plaintiff, the Kirstein Leather Company, Inc., seeks to enjoin Deitrick, the receiver, from bringing suit against it upon a certain check for $2,000, and asks that the title to the check be decreed to be in the plaintiff and that the receiver be ordered to return the same to it. By the counterclaim the receiver asks for judgment on the check.
It appears that the plaintiff, on December 14, 1931, drew its check for $2,000 on the Banca Commerciale Italiana Trust Company, payable to the order of itself, indorsing it — "For Deposit Only to the Credit of the Kirstein Leather Co., Inc." — and that, on the afternoon of that day, deposited the same in the Salem Trust Company, where it had a commercial account. The check, at the time it was deposited with the Trust Company, was accompanied by a deposit slip issued by the Trust Company containing the following provision:
"Checks and Cash Items are credited only subject to payment. The right is reserved, and the Bank is authorized to forward items for collection or payment direct to the drawee or payor bank, or through any other bank, at its discretion, and to receive payments in drafts drawn by the drawee, or other banks, and, except for negligence, this bank shall not be liable for dishonor of the drafts so received in payment, nor for the losses thereon." (Italics supplied.)
And the passbook issued by the Trust Company to the plaintiff, and on which it entered the deposits of the plaintiff, contained the following notice:
"In receiving items for deposit or collection this bank acts only as depositor's collecting agent and assumes no responsibility beyond the exercise of due care. All items are credited subject to final payment in cash or Solvent Credits. This Bank will not be liable for default or negligence of its duly selected correspondents nor for losses in transit, and each correspondent so selected shall not be liable except for its own negligence. This bank or its correspondents may send items directly or indirectly, to any Bank including the payor, and accept its draft or Credit as conditional payment in lieu of Cash; it may charge back any item at any time before final payment, whether returned or not, also any item drawn on this Bank not good at close of business on day deposited." (Italics supplied.)
The Trust Company, having received the check, at once credited the amount of it to the plaintiff's account, thereby raising its balance from $854.71 to $2,854.71, against which on that day the Trust Company honored checks of the plaintiff in the sum of $1,412.67. On the day the check was received the Trust Company affixed to the back thereof the following indorsement:
"Pay to the Order of Any Bank, Banker or Trust Co. Prior endorsements guaranteed Dec. 14, '31 Salem Trust Co. 53-182 Salem, Mass. 53-182 A.F. Fisher, Treasurer"The Trust Company in the afternoon of the same day sent it with other checks, in all amounting to $17,892.39, to its correspondent, the Federal National Bank, where they were received that afternoon. Accompanying the checks was a writing, as follows:
"Salem Trust Company Salem Mass. "Salem, Mass., Dec. 14, 1931
"To the Federal National Bank Boston, Mass.
"For collection items listed below
"Please acknowledge receipt
"Do not protest items $10.00 or under, or those bearing this stamp N.P. 53-182 or similar authority of a preceding endorser."
(The words — "For collection items listed below Please acknowledge receipt" were printed in bold type.)
Then followed a list of the checks transmitted, which list included the check in question, and amounted to $17,892.39. Upon receipt of these checks the Federal National credited them to the Salem Trust Company, whose account was overdrawn at the close of business on Saturday, December 12, 1931, in the sum of $16,737.55; and at the close of the next business day, Monday, December 14, 1931, it was overdrawn in the sum of $14,818.40, although the account had been further credited with other checks sent later that day to the bank by the Trust Company.
Both the Federal National Bank and the Salem Trust Company failed to open for business on December 15, 1931, as the former was then taken over by the Comptroller of the Currency and the latter by the Massachusetts Commissioner of Banks. The Kirstein Leather Company stopped payment on the check and it was returned to the receiver of the Federal National Bank and is now held by him. Later the receiver sent a list of uncollected checks in his possession to the Commissioner, including the one in question, whereupon the amount of the $2,000 check was charged back to the Kirstein Leather Company on the books of the Trust Company. This left a balance due from the Kirstein Leather Company to the Trust Company of $557.98, for the collection of which the Bank Commissioner brought suit against the Kirstein Leather Company. None of the uncollected checks mentioned above were returned to the Salem Trust Company.
Prior to the suspension of business the Federal National Bank would at once return uncollected checks and charge their amounts against the Salem Trust Company account, but in this instance the amount of the check was not charged back to the Salem Trust Company by the receiver, and, at the time of the trial, he had it in his possession.
Hubert C. Thompson, of Boston, Mass. (Samuel Pearl, of Peabody, Mass., and John C. Twomey, of Boston, Mass., on the brief), for appellant.
Leo Wyman, of Boston, Mass. (Andrew J. Aldridge, of Boston, Mass., on the brief), for appellee.
Before BINGHAM, WILSON, and MORTON, Circuit Judges.
In the District Court it was held that the Salem Trust Company was a purchaser for value of the $2,000 check, notwithstanding it had stated in the passbook delivered by it to the plaintiff on receipt of the check that in receiving it "this bank acts only as depositor's collecting agent"; that "all items are credited subject to final payment in cash or Solvent Credits"; and that "it may charge back any item at any time before final payment, whether returned or not"; and notwithstanding the Trust Company also stated on the slip upon which it received the deposit that checks "are credited only subject to payment."
And the court, having held that the Salem Trust Company had become a purchaser for value of the check, further held that the Federal National Bank, upon crediting the check to the Salem Trust Company account and allowing it to draw against that account, became a purchaser for value of the check without notice, notwithstanding the letter with which the check was transmitted to the Federal National Bank specifically stated that the check in question and the other checks transmitted at the same time were for collection, and although the indorsement on the check disclosed that it was deposited with the Trust Company "only to the credit of the Kirstein Leather Co."
We are unable to agree with the District Court on either of these propositions. When the Salem Trust Company received the check with the deposit slip and issued the passbook on which the deposit was entered containing the provision that it received the check "only as depositor's collecting agent," and "credited [it] subject to final payment," reserving the right to charge back the check to the account of the plaintiff in case it was not paid and also the right to do this whether it received back the check or not, it cannot be said that the Salem Trust, Company, under such circumstances, became a purchaser for value without notice and acquired title to the check. Under such circumstances the credit was not a final one and would not become such until the check was collected. It was never collected; the relation of debtor and creditor would not arise until a final credit was established.
Furthermore, the understanding of the Salem Trust Company with regard to the transaction clearly appears not only from the statements made in the passbook and on the deposit slip, but from the fact that, upon receiving notice of the nonpayment of the check, it charged the same back to the account of the plaintiff, as it reserved the right to do, and has brought suit to recover the balance due it.
The conclusion that the Federal National Bank became a purchaser for value of the check in good faith and without notice is, to our minds, equally erroneous. It had notice from the indorsement on the back of the check that the Salem Trust Company received it for deposit only to the credit of the Leather Company, and from the letter of transmittal the Federal National Bank received notice that the check was transmitted to it "for collection"; and the indorsement and transmittal letter, taken together, informed the bank that it was to collect the check, not for the Salem Trust Company's account but for the account of the Kirstein Leather Company. In short the bank was put on notice that the Salem Trust Company was not the owner but was transmitting the check to it for collection for the benefit of the Leather Company and as its agent.
The failure of the receiver to return the dishonored check to the Salem Trust Company after payment was refused was not in accordance with the custom of the bank prior to its suspension of business, for, prior to that time, it was the custom of the Federal National Bank to return at once any uncollected checks and charge back the amount thereof to the account of the Salem Trust Company, all of which goes to show that the credit to the Salem Trust Company was conditioned upon receipt of payment of the check and that the credit was not given with intent to become a purchaser of the check or with any understanding that it should be. It is, moreover, doubtful if any credit was given the Salem Trust Company based on the $2,000 check after its receipt. On the evidence it is as probable as otherwise that, on the afternoon of December 14, before the check and those that accompanied it were received and credited, the amount of the Trust Company's overdraft was more than $17,892.39, and that no reliance could have been placed upon these checks in honoring withdrawals after they were credited. The Salem Trust Company's account in the Federal National Bank on the morning of December 14, 1931, stood overdrawn in the sum of $16,737.55 and, during that day and before the transmittal of the above checks in the afternoon, the overdraft may have exceeded the checks then credited, for withdrawals were made during the day. The receiver, on whom the burden rested to establish the basis of his counterclaim did not show the contrary.
In American Barrel Co. v. Commissioner of Banks et al., 290 Mass. 174, 195 N.E. 335, the Massachusetts Supreme Court reached a like conclusion.
The situation here is not like that in Pearson v. Brennan (C.C.A.) 75 F.2d 958. There the check in question was not made payable to the plaintiff Brennan or deposited by him for collection or otherwise in the Lawrence Trust Company. Neither he nor the Lawrence Trust Company ever had the check and knew nothing about it until long after the failure and closing of the Trust Company and the Federal National Bank. And the brokers, who drew the check and deposited it with the Federal National Bank, and the bank were in no wise put on notice that the plaintiff Brennan had any interest in the check or its proceeds. The bank understood from the statement on the face of the check that the check and its proceeds belonged to the Lawrence Trust Company and credited the check to its account.
The decree of the District Court dismissing the bill and ordering judgment on the counterclaim for the defendant is vacated and the case is remanded to the District Court, with instructions to enter a decree adjudging the plaintiff the owner of the check and enjoining the defendant from prosecuting a suit to collect the same.