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COURT
OF
APPEALS
OF HEW
YORK,
(254 N.Y. 218)
Decided. July 8 , 1930.
WILLIAM
A .
CAES
OH an d
Others,
a s
Trustees i n Bankruptcy of LEONARD
S .
ZARTMAN
a n d
ELLA
S .
ZAUOMAN,
Individual ly
a n d a s
Copartners,
Doing Business under t h e Firm
Name
of G. E .
ZARTMAN
&
COMPANY,
Appellants,
v .
FEDERAL RESERVE BAM of HEW YORE,
Respondent.
APPEAL from
a
judgment
of the
Appellate Division
i n t h e
four th
judicial department reversing a judgment o f the Trial Term
entered on a ve rd ic t of a ju ry i n favor o f th e p l a i n t i f f s and
dismissing
th e
complaint.
ARTHUR E . SUTHERLAND f o r appel lants .
COLIN McLENNAN f o r respondent.
CARDOZO,
Ch. J .
Trustees
i n
"bankruptcy
a r e
seeking
to
recapture moneys collected
by the defendant, a Federal Reserve bank, with notice that a preference
among creditors might
he an
e f f e c t
o f the
co l l ec t ion .
r E . Zartman & Company were engaged f o r many years i n t h e
business
o f
private bankers
a t
Waterloo,
New
York.
On May 16 an d 17 , 1927 ,
there came into t h e possession o f t h e defendant, t h e Federal Reserve Bank
i n t h e Second Fede ral Reserve Di st r i ct , 157 checks drawn on the Zartman
bank
f o r
sums amounting
i n t h e
aggregate
to
$15 ,271.56. These checks ,
drawn by Zartman depositors i n favor of various payees, h a d been indorsed
by the
payees
t o
banks, thir ty- seve n
i n
number, members
of t he
Federal
Reserve banking system,
and by
these indorsed
a nd
t ransmit ted
to the
defendant. The indorsements by the member banks show diversities o f
form, some being simply
to the
order
o f the
Federal Reserve Bank
of New
York, some
to the
order
of any
bank, banker
o r
trust company, some
to the
order of any bank o r banker, a n d some to the order of any Federal Reserve
bank. Accompanying
t h e
checks, when re ce iv ed
by the
defendant, were
l e t t e r s of remit tance . I n these t h e member banks gave notice to the
defendant that th e checks were inclosed f o r c r e d i t , " o r , more commonly,
f o r
" c o l l e c t i o n
a n d
c r e d i t ,
n
"co l l ec t ion
a n d
r e t u rn , "
o r
"co l l ec t ion
a nd
remit tance ." The defendant pursuant t o this mandate caused t h e checks t o
be presented f o r payment t o t h e Zartman bank, t h e drawee named therein.
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—2—
I n
response
t o
this demand,
i t
received
two
d r a f t s ,
o ne f o r
$8,699.25,
th e other f o r $6,572.37, drawn by the Zartman bank i n Waterloo upon the
American 3xchange Irving Trust Company
of New
York. These d r a f t s ,
r e -
ceived
by t he
defendant
on May 18 and 19,
were presorted
to the
t rus t
conpany
f o r
payment
on May 20 and
again
on May 2 1 . On
each presentation
payment w as r e fused on t he ground that t h e d r a f t s h a d been drawn b y
Zartman ag ai ns t un co ll ec te d fun ds. Thereupon,
on May 23 , th e
defend-
ant's manager went
t o
Waterloo
an d
made demand upon Zartman that
the
d r a f t s
be
pa id
i n
ca sh . There
i s no
occasion
to
r e c i t e
th e
conversa-
t i on t h a t ensued. Enough f o r present purposes that what was said might
reasonably
be
found
by t he
t r i o r s
of the
f a c t s
t o
have been notice
to
t h e manager that Zartman was insolvent . Af te r a delay of a few hours
there
was
pa id
t o t h e
defendant
i n
cash
th e
sura
of
$10,363.93.
The
fol lowing day, May 24 , th e doors o f t he Zartman bank were closed f o r
business ,
a n d
have never been reopened.
A
p e t i t i o n
i n
bankruptcy,
f i l e d on June 27, was followed by an ad judica t ion of bankruptcy a nd t he
appointment
of
t r u s t e e s .
The
t r us t ee s
a r e
suing
to
recover
t h e
cash
pa id
t o t he
defendant
on May 23 a s a
voidable preference under
t he
provis ions o f t he Federal s ta tute .
To turn back a t this point to s t a t e t h e defendant ' s use of
th e
proceeds
of
co ll ec ti on s. Uach
of the
member banks
h a d a n
account
with th e defendant, a n account exacted by the statute (Federal Reserve
A ct , 38 U. S .
S t a t .
pp. 251, 270, § 19) as one of the
inc idents
of
membership. These acc oun ts were cr edi t ed on May 19 and 20 with the
amount
of the
Zartman drafts,
i . e . , t he
drafts drawn
on the
t rust
company, which were supposed, when received
by the
defendant,
to be
equivalent
t o
cash.
As
soon
a s
notice came that these drafts
h a d
been
dishonored,
t h e
entry
was
rever sed. Later,
on May 31 , th e
c redi t
was
r e - e s t ab l i shed t o t h e extent of $10,363.93, th e cash payment then i n
hand, each
of th e
thi r ty-seven banks being al lot ted
i t s
appropriate
share. Before t h e bankruptcy pet i t ion, th e banks h a d withdrawn from
their deposit accounts
i n t h e
usual course
of
business moneys equal
to
t h e balances i n thei r favor a t t h e date of the contested credits, though
they
h a d
also made
new
deposits which kept
t h e
daily balances
a t a
level
nearly uniform.
I f t he
first payments
out of t he
accounts
be
appropri -
ated to the f i r s t r e c e i p t s , a l l moneys collected from th e bankrupts ha d
been remitted
by t he
defendant
to the
thirty-seven member banks,
i t s
correspondents
and
deposi tors .
The
t r i a l j udge l e f t
i t t o t he
jury
to say
whether
th e
co l l ec -
t ions h a d been made by the defendant a s agent o r a s owner. The jury
found
f o r t h e
p l a in t i f f , t hus holding
by
the i r verd i c t tha t
t h e
co l lec t ion
was as owner. The Appellate Division held a s a matter of law tha t the
co l l ec t i on
was as
agent, basing
i t s
holding
i n
large degree upon
a n
agreement y e t t o be considered between t h e defendant a n d i t s members.
The
collection having been made
a s
agent,
t h e
conclusion
was
thought
t o
follow that t h e agent was not l iable s ince i t h a d se t t l ed wi th i t s p r i n c i -
pals before
t h e
r i g h t
o f
reclamation
h a d
been perfected
b y t h e
bankruptcy.
We
think
t h e
defendant
was an
agent
a nd no t a n
owner
i n i t s
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r e c e i p t o f t h e Zartman drafts a n d t h e su bs t i tu te d moneys. How th e 15 7
checks were indorsed
by the
payees when deposited with
t h e
member banks,
t h e record does n o t t e l l u s . T he problem to be solved, however, i s :
no t one a s t o t h e re la t ion be tween t h e member banks r n d the i r depos i to rs .
I t i s a
problem
a s t o t h e
relation between those banks
a n d t h e
defendant .
We
assume t h a t
t h e
form
o f t h e
indorsements,
i f n o t
q u a l i f i e d
by
ag ree -
ment, would have pas se d t o t h e defendant such t i t le , i f a n y , a s belonged
t o t h e i nd or se rs (F eder al Reserve Bank v . Malloy, 2 64 U. S . 1 60 , 16 4 ; City
of
Douglas
v .
Federal Reserve Bank,
27 1 IT. S . 48 9;
2:editable Trust
Co. v .
Rochling, 275 U. S . 248 ; Heinr ich v . F i r s t M a t . Ban :," 219 N. Y. 1 ) . An
agreement, however, i s i n ex is tence , t h e terms thereof proscr ibed b y
regula t ions adopted
b y t h e
Feder al Reserve Board under au th or it y co nfe r-
r e d b y t h e p r o v i s i o n s of t h e s t a t u t e . We must loo k t o this agreement t o
discover t h e re la t ion between t h e defendant a n d i t s members in the
process of c o l l e c t i o n .
By the Federal Reserve Ac t , a s f i r s t e n a c t e d in 1913, a . reserve
bank w as au tho r i zed t o collect only those checks which were drawn on
member banks a n d which were deposited b y a member bank o r another reserve
bank
o r t h e
United States (Farmers Bank
v .
Federal Reserve Bank,
262 If.- S .
6 4 9 , 6 5 4 ) . Even then , however, t h e r e g u l a t i o n s of t he Board provided ̂ I n
handling i tems f o r member banks, a Federal Reserve Bank will a c t a s agent
only" (Circular
No. 1 of 1916,
Fe de ra l Reserv e Board Report
of 1916, p .-
1 5 3 , note; Federal Reserve Bulletin, May, 1916 , p p . 259 , 26 0) . The
s t a t u t e w as amended i n September, 1916 ( § 13 ) (39 S t a t . 7 52 ) , so a s t o
author ize
a
reserve bank
to
rece ive
f o r
co l lec t ion f rom
an y
member checks
drawn o n non-member banks located i n t h e d i s t r i c t . The Board renewed i t s
order that
t h e
r e l a t i on shou ld
be one of
agency (Regulation
J ,
subd»
7 ,
Federal Reserve Board, Report
o f 1 9 1 6 , p . 1 7 1 ) . I n 1 9 1 7 t h e
s t a t u t e
was
again amended, this time b y a provi s ion tha t " s o le l y f o r t h e purposes of
exchange
or of
c o l l e c t i o n , "
a
reserve bank
may
receive f rom
a
non-member
bank o r t r u s t company checks payab le upon pr es en ta ti on , upon co nd it io n
that such non-member bank o r t r u s t company mai nt ain a n adequate balance
with
t h e
reserve bank
of i t s
d i s t r i c t
(Act of
June
21 , 191 7, ch , 32, § 4;
4 0 S t a t . 2 3 2 , 2 3 4 ; c f . 2 6 2 U . S . a t p . 6 5 5 ) . Col lec tio ns were thus p e r -
missible both f o r members a n d f o r non-members. •
I n t h e
s e t t i n g
of
t h i s s t a tu t e , Regu la t i on
J
( s e r i e s
of 1924)
was
adopted
b y t h e
Board,
and i s now to be
cons t rued .
I t
r e c i t e s
( i n
terms
s u b s t a n t i a l l y t h e same a s those of ea r l i e r r egu l a t i ons ) t ha t t h e Board,
" des i r i ng
t o
a f fo rd both
t o t h e
pub l i c
a n d t o t h e
various banks
of the
country a d i r ec t , exped i t i ous a n d economical system of check co l l ec t io n and
se t t l ement of ba lances , h a s arranged to have each Federal reserve bank
exe rc i s e
t h e
func t ions
o f a
c l ea r i ng house
a n d
co l l ec t chocks
f o r
such
of
i t s
member banks
a s
d e s i r e
t o
av a il themselves
of i t s
p r i v i l e g e s , "
t o
which i s added a r e c i t a l t h a t l i k e p r i v i l e g e s w i l l be a f f o r d e d t o n o n -
jnembor banks
a n d
t rust companies qual i fying
i n
cer ta in ways.
I t
then
proceeds to a s ta tement of t he terms a n d condi t ions o n which business may
b e dene. The Feder al Reserve Board hereby aut ho ri ze s t h e Federal reserve
^b&riks
t o
handle such checks subject
t o t h e
following terms
a n d
condi t ions;
a n d
each member
a n d
nonmember clearing bank which sends chocks
to any
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Fede ral re se rv e bank: sh al l
by
such action
b e
deemed
( a ) t o
au thor ize
t h e Federal reserve "banks t o handle such checks subject t o t h e following
terms
a n d
condi t ions ,
( b ) to
warrant
i t s own
a u t h o r i t y
t o
give
t h e F e d -
er al r ese rve banks such au th or it y, a nd ( c ) to agree to indemnify any
federa l reserve bank
f o r a n y
loss resu l t ing f rom
th e
f a i l u r e
o f
such
sending bank t o have such a u t h o r i t y . " Among th e terms a n d condit ions
thus proscr ibed a r e these : A Federal r es er ve bank wi ll a c t only a s
agent
o f the
bank from which
i t
receives such checks." A Federal
r e -
servo bank may pr es e nt such checks f o r payment o r send such chocks f o r
c o l l e c t i o n d i r e c t
t o t h e
bank
on
which they
a r e
drawn,"
o r
forward them
t o another agent ." A Fed era l res erv e bank may * * * a t- i t s option,
e i t h e r d i r e c t l y
o r
through
a n
agent , accept
* * *
frank drafts
* * *
c a s
k»" without being l iable f o r a n y loss thereby resu l t ing .
The
amount
of any
check
f o r
which payment
i n
a c t u a l l y
a n d
f i n a l l y
co l lec ted funds i s n o t received shal l b e charged back t o t h e forwarding
bank, regardless
of
whether
o r n o t t h e
check i t se l f
can be
re turned ."
Finally each Federal He se rve bank may promulgate i t s o w n r egu la t ions ,
n o t
inconsis ten t wi th
l a w o r
with
t h e
r egu la t ions o f
t h e
Board,
and
such regulat ions shal l be binding upon member a n d n o n m e m b e r banks a -
v a i l i n g o f i t s p r i v i l e g e s .
Pursuant
t o t h e
authori ty thus conferred,
t h e
defendant made
i t s o w n
r egu la t ions ( c i r c u la r
Ho . 728 ,
Ju ly
1 ,
1926) , reaf f i rming
the
regula t ions adopted by the Board a n d supplementing them by o t h e r s . One
of the
supplemental rules prescribes
t h e
period that shal l elapse before
a n y c r e d i t s h a l l b e al lowed, e i t her p rov is ional o r f i n a l , f o r checks
sent
i n b y
members. Cr ed it
may be
given
a t
once
i n
what
i s
known
as a
deferred, account, n o t sub jec t to be drawn o n , b u t t h e r e is to be no
c r e d i t
i n t h e
reserve account un t i l
t h e
appropriate t ime indicated
on
e current t ime schedule h a s el ap se d, " though even upon en tr y i n that
account , "cred i t
a n d
a v a i l a b i l i t y
a r e i n a l l
ins tances sub ject
to * * *
ac tua l r ece ip t o f payment." The t ime schedule thus referred t o i s based
upon th e average ma ili ng time re qui re d f o r i tems t o reach t h e paying bank,
p lu s
t h e
t ime required
f o r t h e
paying bank
to
remit
t o t h e
defendant .
Another supplemental rule gives notice t o member banks a n d others that
defendant will handlo chocks
a s
cash items only
i n
accordance with uniform
i n s t r u c t i o n t h e r e i n s e t f o r t h , a n d t h a t a n y cont rary o r spec ia l i n s t ruc -
tions noted
on
c a s h l e t t e r s
o r
a t t ached
to
checks will
b e
'd isregarded."
Another yule prescribes t h e form of the indorsement to be adhered to by t r ans -
mitting banks, whether members
o r
non-members.
The
indorsement must
b e
" w i t h o u t r e s t r i c t i o n t o t h e order of the Federal Reserve Bank of New York
or to the
order
of any
bank, banker,
o r
t r u s t company wi th
a l l
p r i o r
i n -
dorsements guara ntee d.." This form i s necessary, a s h a s been stated, whether
t h e
checks t ransmit ted
t o t h e
defendant
a r e
from members
o r
non-members
though t h e s t a t u t e i s e x p l i c i t t o t h e e f f ec t t ha t t here sha l l be no power
i n a
reserve bank
t o
handle checks
f o r
non-members except "solely
f o r t h e
purposes
of
exchange
or of
co ll ec ti on " (Fed eral Reserve Bank
A ct , 6 13 ,
amendment^of 191 7, § 4) . P la in l y , then, th e form o f th e indorsement was
n o t
conceived
of as
involv ing
a
departure from
t h e
mandate
o f th e
s ta tu te*
P la in ly ,
t o o , i t w a s n o t
conceived
of as
inconsistent with t5je regulat ions
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an d t h e circular whereby checks received from any "bank a r e to be handled
by the reserve "banks i n t h e capaci ty o f agents only. The same circular
an d
regula t ions tha t prescr ibe
th e
form
of th e
indorsement establish
the
p r a c t i c e
an d t h e
agreement
to
receive
th e
checks
a s
agent ,
a n d
give
not ice
t o
tra ns mit t in g banks tha t
t h e
terms thus established shall
be
exclusive of any o thers .
Th e inference of ownership that follows i n most cases from
a n unqualified indorsement i s one dependent upon intention. I t may be
overborne
by
agreement
to the
contrary, whether
th e
evidence
of
agree-
ment
be
d i r e c t
o r
circumstantial (Federal Reserve Bank
v .
Malloy, supra,
a t p . 1 6 4 ) .
Direct
a s
well
a s
c i rcumstant ia l
i s t h e
evidence before
u s .
The r egu l a t i ons of the Board, reinforced by the defendant
4
s c i rcular ,
an d assented to by the transmitt ing banks, a r e equivalent to an express
agreement that
a s
between
t h e
defendant
and the
other banks
t h e
r e l a t i on
engendered
by the
r ece ip t
of
un col lect ed paper sha l l
be an
agency
and
nothing more.
The
agreement
i s
confirmed
b y t h e
underlying purposes
and
p o l i c i e s of the Federal reserve system" ( p e r CROUCH, J . , i n t h e court
be-low), by the p lace of the reserve banks in t h e d i s t r i b u t i o n of banking
func t i ons a s conceived a n d developed by the framers of t he st at u te . There
i s no token of a purpose to burden clearance a n d co l lec t ion wi th t h e r e -
s p o n s i b i l i t i e s
of
ownership.
The
argument
i s
made that
a
d i s t i n c t i o n
i s to be
drawn between
co l l ec t i on
f o r t h e
member banks
a n d
co l l ec t i on
f o r t h e u s e o f
o thers .
The regula t ions an d t h e c i r c u l a r do no t express such a d i s t i n c t i o n ; i f
i t i s t o b e made, i t must b e i n t e rpo l a t ed by a process of cons t ruc t ion .
We are told that what i s sa id i n t h e ru l e s as to the ex i s tence of an agency
h a d i t s o r i g i n in an at tempted adaptat ion of the s t r u c t u r e of the system
t o t h e
n e c e s s i t i e s
of the new
"business made possible
in 1917
through
th e
amendment
of t he
s t a t u t e . Ti l l then, co l lec t ions
b y a
reserve bank were
always
f o r t h e
account
of
member banks,
f o r
whom
i t was
a l so
a t
l i be r t y
t o
receive checks
o r
moneys
f o r
dep osi t . Since then, the re
may
a l so
b e
co l l ec t i ons
f o r t h e
convenience
of
non-members.
To
these
an d t o
these
only,
we a r e
t o ld ,
t h e
r egu l a t i on
an d t h e
circular were intended
to
apply.
The h i s t o ry , s t a t u to ry and. adminis t ra t ive , of the Federal Reserve system
teaches a di f f er en t less on. There i s no connection, temporal o r causal ,
between th e genesis of the rule that th e r e l a t i on sha l l be one of agency
an d th e
enlargement
of the
f i e l d
of
business following
t h e
amendment
of
t h e
st a t u t e . Long "before the re
was
power
t o
make clearances
o r
co l lec t ions
f o r
banks
n o t
members
of the
system, there
was
a l ready
a
statement
in t h e
rules that i n t h e handl ing of checks and drafts when forwarded by members.,
t h e reserve banks were to be deemed t o a c t i n t h e capaci ty of agents only.
Amendments of the ru l e s have r e s t r a ined r e spons ib i l i t y s t i l l f a r t he r by
adding
a
provis ion tha t
th e
agency shall
b e o n e f o r t h e
forwarding bank,
an d n o t f o r any
other, thereby excluding
a n
at tempt
t o
convert
i t
in to
an
agency
f o r t h e
payees
of the
checks,
th e
or iginal deposi tors (Federal
R e-
serve Bank
v .
Malloy, supra; City
of
Douglas
v .
Fede ral Reserve Bank, s up ra ).
From t h e beginning, however, th e r e l a t i o n h a s been c l a s s i f i ed a s agency,
n o t ownership. A c l a s s i f i c a t i o n so e x p l i c i t may no t be he ld to have been
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neu t ra l i zed by the terms of the "cash letters,'* vzith their varying decla-
ra t ions that
t h e
checks
a r e
inclosed
f o r
" c r e d i t , "
o r f o r
"co l lec t ion
a n d
c r e d i t , "
o r f o r
"co l l ec t ion
an d
remittance"
( c f .
Bank
of
America
v. Way d e l l , 187 N. Y. 115 , 12 0) . By express provision of the defendant
1
s
c i r c u l a r
th e
le t ters must
be
disregarded
i f
inc ons ist ent v;ith
th e
uniform
prac t i ce es t ab l i shed b y t h e c i r cu la r and by the regula t ions of the
Board behind i t . There an d novzhere e l se , l e a s t o f a l l i n a perfunctory
notice
of
remittance embodied
i n a
printed form,
th e
agreement governing
t h e
r e l a t i o n
ha s i t s
f i n a l
an d
complete expression.
I f t h e
defendant
was an
agent
i n t h e
r ece ip t
of the
Zartman
d r a f t s an d t h e substituted moneys, t h e ques-tion must s t i l l be met whether
i t s l i a b i l i t y w as enlarged b y an y o f i t s a c t s t h e r e a f t e r . We must say
whether
t h e
agent became subject
to t h e
l i a b i l i t y
of an
owner when
ins t ead
o f
r emi t t i ng
t h e
proceeds
of
co l l ec t ion d i r ec t ly
t o i t s
p r i n c i -
pa l s , i t p u t t h e proceeds to thei r cred i t i n a n ordinary deposit account,
thereby turning
th e
re la t ion f rom
one of
agency into
one of
c r e d i t o r
and
debtor .
I n
e f f e c t ,
th e
s i t u a t i o n
was
then
th e
same
as i f t h e
defendant,
receiv ing
t h e
money
i n t h e
capaci ty
of
agent,
h a d
handed
i t
over
to t h e
p r i n c i p a l s , a n d h a d received i t back a t once to be r e t a ined a s a deposit
(Commercial Bank of Penn. v . Armstrong, 14 8 U. S. 50, 58, 5 9; Marine Bank
v»
Fulton Bank,
3
Wall. ( U.S. )
2 5 2 :
Evansville Bank
v .
German American
Bank, 1 55 U. S. 5 56; National B. & D. Bank v . Hubbell, 117 N. Y. 384, 396 ;
Langley v . Warner, 3 N. Y# 32 7, 3 2 9 ). We think the new r e l a t i o n d id no t
take from
t h e
defendant
t h e
p ro tec t ion
of the
r ul e th at money pa id
to an
agent,
and
lawful ly accepted,
may no t
t h e r e a f t e r
b e
reclaimed
by one who
h a s made t h e payment with notice of the agency, i f before t h e attempted
reclamation
th e
agent
i n
good faith
h a s
se t t le d wi th
t h e
pr incipal
(National Park Bank
v .
Seaboard Bank,
114 IT. Y. 28;
National City Bank
v .
Westcott ,
118 N. Ye 468, 47 3, 474 ;
Hooper
v .
Robinson,
98 U. S. 528 ;
Buller
v .
Harrison,
1
Cowper,
5 6 5 ) .
True, indee d,
i t i s
tha t
th e
settlement
s u f f i c i e n t t o c al l th i s pre ce pt into play must be ac tua l and no t construc-
t ive (Buller v . Harrison, supra: Mowatt v . McLelan, 1 Wend. 173, 178; La
Farge
v .
Knee la nd .
7 Cow . 4 5 6 , 4 6 0 ) . I f a l l
t h a t
t h e
agent
h a s
done
i s
t o agree with t h e pr in cipa l that th e fund , s t i l l i n t ac t , sha l l b e held
t h e r e a f t e r a s a debtor, h e i s n o t sub jected to any l o s s i f d i r ec t ed to
make res t i tu t ion
o u t o f t h e
moneys thus retained
( c f . La Far go v . Kne
elan d
a n d
Mowatt
v .
McLelan, supra).
On th e
other hand, when once
th e
fund
h a s been depleted b y payment of the debt, th e situation becomes th e same
a s i f t h e
payment
t o t h e
p r i n c i p a l
h a d
been made
a t t h e
beginning.
The
agent
i s no
b e t t e r ,
o f f b y
reason
of the new
r e l a t i o n ,
b u t
even
if no
b e t t e r ,
h e i s
equal ly
no
worse.
As to this aspect of the case, th e ru l ing i n National Park Bank
v .
Seaboard Bank (supra)
i s a
precedent
so
nearly ident ical that
i t
must
b e
accepted
a s
de ci si ve . There
th e
Seaboard Bank received
a
check
f o r
c o l l e c t i o n a s agent f o r t h e Eldred Bank an d upon receipt o f t h e proceeds
gave notice
t o i t s
p r i n c i p a l
i n
accordance with
a
course
of
dealing that
t h e
proceeds
h a d
been credi ted
i n a n
account current between them
on
which
drafts from time t o time were drawn as on an ordinary account between a
bank
an d a
dep osi tor . There
can be no
question that
t h e
collecting bank,
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af ter
t h e
giving o f this notice, was at l iberty to use the proceeds with
a l l
th e freedom
of an
owner, discharged
of any
duty
to
remit
i n
specie
to th e principal ( c f . Commercial Bank of Penn. v . Armstrong, supra;
Marine Bank v . Fulton Bank, supra). Even so, the ruling was that i t
could no longer be held to res t i tu t ion at the su i t of the drawee bank
a f t e r th e drafts on the account current had exhausted the credit balance
exist ing at the time of the col l ec t ion . To determine whether t h e b a l -
ance had been used up, the court applied th e rule i n Clayton's Case
( 1
Meriv.
572, 604, 608)
whereby
the
successive payments
and
credits
are to be
appropriated
in
discharge
of the
items
o f
debt antecedently
due in the order o f time i n which they stand in the account, th e f i r s t
payments o u t extinguishing the first payments i n . There a r e many other
cases, State
and
Federal, enfor cing
a
like rule (Allon
v .
Culver,
3
Denio, 284, 293; Thompson v . S t . Nicholas Hat. Bank, 1 13 N. Y. 32 5, 333;
Delaware Dredging Co. v. Tucker Co ., 25 Fed. Rep. (2d ) 44, 46; Cory Bros.
& Co. v . Ownors of S. S . Mecca, 1897 A. C. 28 6, 288; Deeloy v . Lloyd's
Bank,
lt d . , 1912 A. C. 756 , 783;
Matter
o f
Stenning, (1895)
2 Ch. 433) .
We have no thought t o suggest that this or any other formula as to the
application o f payments to the items of an account i s o f such inflexible
va l id i ty as to admit of no excep tio ns. Whatever rule i s framed w i l l be
subordinated
to the
broader pr inc ip le that
an
application, usually
ap -
propriate, may be varied by the court when variance i s necessary to promote
th e ends of justice (Korbly v . Springfield Inst, f o r Savings, 245 U. S. 330 ;
Lichtenstein
v .
Grossman Constr. Corp.,-
248 N. Y. 390 ;
Matter
o f
Hal let t ' s
Estate. 13 Ch. D iv . 696; Cunningham v.• Brown, 365 U> S. 1 , 12, 1 3 ) . Hone
th e l e s s , th e formula i s expressive of a rule that must prevail in the
absence o f persuasive reasons f o r qual i f icat ion or exception. We cannot
f a i r l y say that just ice wil l be thwarted i f t h e rule i s followed here,
The principals ar e solvent banks, and the trustees a r e a t l iberty t o pursue
th e moneys i n their hands (Matter of Hil l Co. . 130 Fed . Rep. 315 , 31 8) .
At l e a s t , i f there is any obst acle , there i s nothing in the record to te l l
u s
what
i t i s . No
obvious requirement
o f
pol icy
or
justice exacts
the
suspension or abandonment of an established rule of law to the end that
collection from an agent may take th e place of an exi s t ing and suf f i c i en t
remedy by suit against th e principals .
Passing, then, from
th e
question
of the
application
o f
payments,
we come back to the inquiry whether th o immunity of the agent i s l o s t or
impaired when the proceeds of the collec t ion, instead o f being remitted to
the
principal
a t
once,
a r e
retained
a s a
deposit
and
remitted later
on.
What was held on that subject in t h e case of the Seaboard Bank has not
been modified by anything decided si nc e that time. National B. & D. Bank
v..H ubbel l (su pra), w ith some ana logie s on the surface, i s essent ial ly
dissimilar.
The
f a c t s
in t h e
Hubbell case were th es e: Checks forwarded
f o r c o l l e c t i o n had been placed when collected to the credit o f a deposit
account. Upon th e fa i lure of the bank, the depositor made claim to the
proceeds
in t h e
hands
o f a
receiver
a s i f
subject
to a
trust, though
the
entry
in t h e
deposit account
had
been made with
i t s
assent.
Tho
court
held that t h e claim h ad been turned into a debt, and that the depositor
must come in and share with the general creditors ( c f . Latzko v . Equitable
Trust Co ., 275 U. S. 2 5 4 ) . The point to be determined was the l i a b i l i t y of
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a n
agent
t o a
p r i n c i p a l ,
of a
bank;
t o i t s
correspondent , af ter
the
terminat ion of the agency. Ho question was involved, a s t o i t s l i a b i l i t y
to a th i rd person , th e drawee of the checks, seeking r e st i tu t i on a f t e r
th e
agent
an d t h e
p r inc ipa l
h a d
made
a
settlement between themselves.
We
conclude,
as i n t h e
Seaboard case, that
th e
defendant
d id
n o t enlarge i t s l i a b i l i t y to the r ep resen ta t ives o f t h e bankrupts
when, af ter col lect ion
w as
complete,
i t
transformed
i t s
r e l a t i o n
to
th e forwarders from agency t o debt, le ga l concepts wi ll not be
s t r a ined
t o
r e l i e v e
an
agent
of
l i a b i l i t y
by
force
of a
settlement that
i s
merely formal
o r
const ruct ive ,
b u t b y t h e
same token they will
not be
s t ra ined agains t him to charge him w it h l i a b i l i t y . I n a formal o r co n -
struct ive sense,
th e
defendant, acting
a s
agent , s et t l ed with
i t s
principals when by t he e n t r i e s i n i t s books i n accordance with th e
course
of
deal ing
i t
gave
u p t h e
moneys received
b y i t a s
agent
and
took thorn back
a s
de bt or . Such
a
set t lement wil l
n o t
h a l t
th e
pursu i t
and re l ievo f rom l i a b i l i t y while th e fund i s s t i l l i n t a c t . I t w i l l not
open
t h e
door
to
enable
t h e
pu r su i t
to be
continued when
t h e
fund
h as
been disbursed.
,7e have s ai d th at th e money was lawful ly co l lec ted by the
agent
and was
paid
by the
drawee with notice
of the
agency. Lawful
the
co l l ec t ion w as a t t h e moment of the making, though th e agent i n c o l l e c t -
i n g h a d cause to believe that th e e f f e c t of the payment would be a p r e f e r -
ence among creditors.
The
statute does
n o t s ay
that
one who
accepts
a
payment from a debtor believed to be insolvent i s g u i l t y of a fraud
(Van
Ide r s t ine
v .
National Discount
C o. , 2 27 U. S. 575, 5 82;
Wilson
v .
Mitchell Woodbury Co . , 214 Mass. 514, 519; Grandison v . Robertson, 231
Fed . Hep . 785 , 78 8) . A payment so made i s n o t even voidable th er ea ft er
unless
a
p e t i t i o n
i n
bankruptcy follows within four months.
I f
that
interval elapses with bankruptcy postponed, th e preference, however
dubious
i n i t s
making,
i s
proof against assaul t ,
'we may n o t
hold
i n
such conditions that
t h e
defendant
by the
mere acceptance
of the
money
was g u i l t y of a wrong, and so chargeable wi th l iab i l i ty i f i t d id n o t keep
th e
fu nd i n t a c t (Mechem
on
Agency,
v o l . 1 , § § 1435 ,
1436). Before re tu rn
became a duty, t h e money was paid o u t . I f there was need of notice t o
th e
drawee that
t h e
drafts were col lected
by the
defendant
a s
agent
and
not as
owner (Mechem, supra,
§ 1439;
Holt
v .
Ross,
54 N, Y. 472 ;
National
City Bank
v .
T/estcott ,
118 JT. Y. 468 , 47 3;
Canal Bank
v .
Bank
of
Albany,
1
Hi l l ,
2 8 7 ; c f . ,
however, Williston,
on
Contracts ,
v o l . 3 , § 1 5 9 5,
note),
we think t h e no t ice w as imparted by the regula t ions an d t h e c i r cu la r s ,
publ ic
an d
official documents, which, like
th e
l i m i t a t i o n s
of a
corporate
charter, were
to be
heeded
by the
world
a t
l a r g e .
But
no t ice
was
unnecessary, i f t h e defendant was not a c red i to r , f o r t h e r i g h t to avoid
th e
p re fe rence
i s t h e
creature
of the
s t a t u t e ,
and the
f a c t ,
not the
supposi t ion o r fancy o f t h e debtor, must tell u s when t h e r igh t ex i s t s .
17e pas s t hen to t h e f i n a l question, whether wit hin th e meaning
of th e Ac t of
Congress
a
bank collecting
a
d r a f t
a s
agent,
an d n o t a s
owner
(Matter
of
H i l l
C o . ,
supra) ,
i s a
credi tor subject
to a
duty
to
make
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r e s t i t u t i o n
of a
preference, though there
h a s
"been remittance
t o i t s
pr inc ipa l p r io r t o t h e 'bankruptcy. There can he no answer without
r e c a l l i n g
t h e
prov is ions
of the
s t a tu t e .
Bankruptcy
A c t ,
sect ion
6 0 - b
(Jiason's
U. S«
Code, t i t le
11,
ch . 6 , § 96)
provides:
I f a
"bankrupt shall
* * *
have made
a
t r ans fe r
of any of h i s proper ty , a n d i f , a t t h e time of the t r a n s f e r * * * an d
* * *
within four months before
th e
f i l i n g
of the
p e t i t i o n
i n
bank-
ruptcy * * * , th e bankrupt b e inso lven t , and * * * the t ransfer then
operate a s a p re fe rence , an d t h e person receiving i t o r to be benef i ted
thereby,
o r h i s
agent ac ti ng ther ei n, sh al l then have reas onabl e cause
to bel ieve that t h e enforcement o f such * * * t ransfer would ef fect a
preference, i t s h a l l b e voidable b y t h e t r u s t e e and he may recover the
proper ty
o r i t s
val ue from such pe rs on ."
One who
accep ts
a
preference
n o t f o r h i s o wn
account
b a t a s
agent f o r a p r i n c i p a l i s n o t t h e person receiving i t o r t o b e benef i ted
thereby." To be sure, th e p r inc ipa l i s chargeable with notice imparted
t o t h e
agent
as t o t h e
f inancia l condi t ion
o f t h e
debtor
a n d t h e t e n -
dency of th e payment to e f f e c t a p re fe rence . To be sure, als o, the
agent
may be
sued direct ly
i f t h e
t i t l e
i s i n h i s
name
a n d t h e
subject
of the
t r a n s f e r i n t a c t
i n h i s
possession, ju st
a s
suit might
be
brought
i n l ike condit ions against any other trustee holding money o r other
proper ty
t h e
f r u i t s
of an
unlawful sale.
The on e who
r ece ives
a
p r e f e r -
ence, however, within t h e meaning of th e s t a t u t e , i s th e one who i s
p r e f e r r e d , and the one who i s p r e f e r r e d i s n o t t h e mere custodian o r
intermediary,
b u t t h e
cred i to r , p resen t
o r
cont ingent ,
who
receives
b y
v i r tue of the preference a n excessive share of the e s t a t e . The s t a tu t e
does
n o t
in tend ,
of
course, that
t h e
fo ra
of th e
t ransact ion shal l
be
permi t ted
t o
o b s c u r e r e a l i t i e s .
To
cons t i t u t e
a
preference,
i t i s n o t
necessary that t h e t r a n s f e r be made directly to t h e c r e d i t o r . I t may be
made
to
another
f o r h i s
be ne fi t" (na tio nal Bank
of
Newport
v .
national
Herkimer County Bank. 2 3 5 U . S . 1 7 8 , 1 8 4 ) . This wi ll happen, f o r example,
i f bankrupts make a t r a n s f e r of the i r a s se t s t o a c red i to r o f t h e i r own
c r e d i t o r ,
who i s
thus p re f e r r ed
to t h e
same extent
a s i f t h e
t ransfer
h a d
been made
to h im
d i r e c t l y
( 2 2 5 U . S . a t p . 1 8 4 ) .
There
h a s
been
no
attempt i n t h e decis ions t o catalogue forms of b e n e f i t an d methods of
evasion.
No
doubt
t h e
case supposed
i s
typ ical
of
o t h e r s .
One
thread
of
un i formi ty
may be
looked
f o r ,
none
th e
less, among
a l l
d i v e r s i t i e s
of
circumstance*• The person to be charged wi th l i a b i l i t y , i f h e h a s parted
before
t h e
bankruptcy with t i t l e
a n d
possession, must have been more than
a mere custodian, an intermediary o r conduit between t h e bankrupt and the
cred i to r . Di rec t ly
o r
i n d i r e c t l y
he
must have
h ad a
benef i c i a l i n t e res t
i n t h e preference to be avoided, th e thing to be reclaimed. One wi l l
f i nd a n a p po si t e i l l u s t r a t i o n o f t h e e f f e c t an d meaning of the s t a t u t e
i n t h e
holding
i n
Keystone Warehouse
Co. v . Bis
s e l l
( 2 0 3 Fed . Rep . 6 5 2 ) . •
The buyer o f f lour , in tending t o p r e f e r t h e s e l l e r , made payments to a
warehouseman who had no t ice of insolvency. The holding was that th e
warehouseman,
who had
r emi t t ed
th e
payments
t o t h e
s e l l e r ,
was no t
charge-
ab le the rea f t e r
a t t h e
s u i t
of the
t r u s t e e s .
A
possessory r igh t
o r
special
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property having
i t s
o r i g in
i n t h e
bailment
nay
have given
him
capacity
t o
maintain
a
su i t
f o r
flour wrongfully withdrawn,
b u t d i d n o t
turn
him
into
a
c redi tor rece iv ing d i rec t ly
o r
i n d i r e c t l y
t h e
b e n e f i t
of a
p r e f -
erenc e. Merc anti le Trust Co. v. Schlaf ly (299 Fed . Hep . 202) , much
r e l i e d on by the p l a i n t i f f s , i s no t a holding to t h e contrary, f o r there
th e defendant to be charged, a trustee under a mortgage, h a d t h e moneys
i n i t s
possess ion ,
th e
suit being brought before distribution among
th e
bondholders
( 2 9 9 Fed . Rep . a t p . 2 0 3 ) .
True, indeed,
i t i s
tha t
the
phraseology o f t h e s t a t u t e i s inexact an d ambiguous. Even so, a court
wi l l
be
caut ious
i n
imputing
to the
lawmakers
a
purpose
to
uproot
th e
s e t t l e d p r i n c i p l e s
of the
common
law as to th e
e f f e c t
of
payment
to an
agent when followed by a se t t l ement . A l l t h i s i s t h e more pl ai nl y t ru e
i n view o f t h e a n ti th es is cl ea rl y marked upon th e f ace of the enactment
between
t h e
r e c i p i e n t s
of
bene f i t , d i r ec t
o r
i n d i r e c t ,
who a r e t h e p e r -
sons to be sued, and the i r agents i n t h e business of the t r ans f e r ,
whose l i ab i l i t y ,
i f i t
e x i s t s ,
i s
secondary
a n d
i n c i d e n t a l
to t h e
l i a b i l i t y
of others .
We fi nd nothing in con sis ten t with these views i n Marine Trust
Co. v . Lauria (21 3 App. D iv. 64; a f f d . , 244 IT. Y. 577) and Matter of
Veler (249 Fe d . Rep . 63 3) . A bank t o which a check i s t r a n s f e r r e d by a
res t r ic t ive indorsement
f o r
col lect ion only
may
maintain
a n
ac t i on
on the
check
in i t s own
name because section
67 of t he
Negotiable Instruments
law (Cons. Laws, ch . 3 8 ) says that i t may (Marine Trust Co. v . Lauria,
supra; c f . Hays v . Ha.thorn. 74 N. Y. 486 ; Spencer v . Standard C. & M. Corp..
237 N. Y . 479) . Th is does n o t mean that i t i s owner fo r every purpose; i n -
deed by the very hypothesis i t i s n o t owner, b u t co ll ec to r. Whether i t
i s p r i v i l e g e d i n l ike circumstances t o maintain a p e t i t i o n i n bankruptcy
mast
b e
h e l d
to be
s t i l l u n c e r t a i n .
The
opinion
i n
Matter
of
Veler (supra)
deals with
a
case where there
w as
more than
a
mere agen cy.
The
assignee
h ad a
t i t l e a b s o l u t e
o n i t s
face, though
t h e
motive
of the
assignment
was
t o
f a c i l i t a t e c o ll e c t io n
f o r t h e
b e n e f i t
of
ano th er . Motive witho ut more
may be
i n s u f f i c i e n t
t o
derogate from t i t l e (Sheridan
v .
Mayor.
68 N. Y. 30;
Hays v. Ha thorn, supr a) . Bu t t h e r i g h t to su e , i f i t exists, does n o t mean
of necessi ty that t h e su i t o r i s rec iproca l ly subjec t t o a l i a b i l i t y to be
s u e d
(Keystone Warehouse 'Co. v . MsselT.' sugraT."We^think t h e mnsf
be
read
i n
conformity with common-law analogies
to
exempt
a n
agent
o r
custodian from
t h e
duty
to
account
f o r
proper ty
o r
money,
t h e
subject
of
a
preference ,
i f
oefore
t h e
coming
of
bankruptcy
h e h as
s e t t l e d v i t hh i s
p r inc ipa l .
The judgment should be aff i rmed vi th cos ts .
POUND,
CRA2I3
LEHMAN, K3LL0G-G, O'BRIEN
a n d
HUBBS,
J J. ,
concur.
Judgment affirmed.
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