Carnegie Trust Co. v. First National Bank

Scott, J.: Although this judgment is in form one founded upon a verdict, there is no dispute as to the facts and only a question of law is involved. The defendant is sued upon its certification of a check for $2,953.92 drawn upon it by the G-erman National Bank of Cincinnati in favor of plaintiff. The check represented the proceeds of certain checks owned by plaintiff which it had sent to the Cincinnati bank for collection. The check was dated January 5, 1911, and was received at the Carnegie Trust Company, by mail, before banking hours on the morning of January 7, 1911. At that time the plaintiff had become insolvent, and the Superintendent of Banks had taken charge of it and was proceeding to liquidate its affairs under the provisions of section 19 of the Banking Law (Consol. Laws, chap. 2 [Laws of 1909, chap. 10], as amd. by Laws of 1910, chap. 452). The person representing the Superintendent of Banks was thó Deputy Superintendent who, finding the check in suit in the mail addressed to plaintiff, at once sent it by messenger to defendant for certification, and defendant accordingly certified it. The said Deputy Superintendent made no examination of plaintiff’s books to ascertain the state of the account between plaintiff and the Cincinnati bank. If he had done so, he would have discovered, as was the fact, that the plaintiff was indebted to the Cincinnati bank in a much larger amount than was called for by the check in suit. Within an hour or so after the check had been certified, defendant received telegraphic instructions from the Cincinnati bank to stop payment upon the check, whereupon defendant promptly notified plaintiff of the purport of these instructions. When the check was presented for payment the defendant refused to pay it. It was admitted that the check had not been nego [714] tiated to any holder in due course; was and is in the possession of the plaintiff and of the Superintendent of Banks as liquidator; that the rights of no third parties in respect of said check or the acceptance thereof had intervened, and that when the German National Bank of Cincinnati filed its claim against plaintiff (as it subsequently did), it offered to deduct from the amount due to it from plaintiff the. sum represented by said check. The respondent relies upon the broad proposition, for which there is abundant authority, that a certification of a check or draft creates a new contract between the holder and the bank which makes the certification, the effect of which is to impose upon the bank certifying it an obligation to pay the check to the holder. But this rule is subject to the qualification that if the new contract evidenced by the certification has been induced by mistake, and the rights of no third parties have intervened, and the holder has lost nothing nor changed his position in reliance upon the certification, the certifying bank maybe relieved from liability. (Irving Bank v. Wetherald, 36 N. Y. 335; Mount Morris Bank v. Twenty-third Ward Bank, 172 id. 244.) In accepting a draft or certifying a check, a bank acts, in a sense, as the agent of the drawer; that is to say, it warrants the genuineness of the drawer’s signature and his capacity to sign, ¿nd represents that he has on deposit with the acceptor sufficient funds to pay the draft or check, which funds it undertakes shall not be withdrawn or applied to any other purpose than the payment of the check or draft. It does not, however, warrant the title of the drawee or his right to collect the check. The obligation to pay the check or draft upon presentation is, therefore, a. qualified one, which becomes absolute if the paper passes into the hands of a third party bona fide, .or if the holder changes his position to his disadvantage in reliance upon the certificate or acceptance. (Clews v. Bank of New York Nat. Banking Assn., 89 N. Y. 419; White v. Continental Nat. Bank, 64 id. 316.) In the case at bar there can be no doubt that, upon the insolvency of the Carnegie Trust Company, the Cincinnati bank had a right to set off the amount of the check in question which.it owed plaintiff against the much larger amount which [715] the Carnegie Trust Company owed, to it. (Scott v. Armstrong, 146 U. S. 499; Hughitt v. Hayes, 136 N. Y. 163.) The facts which were unknown to defendant, but were known to or within the knowledge of the Deputy Superintendent of Banks, were that the Carnegie Trust Company was insolvent, and that it owed to the Cincinnati bank a large balance on account, so that the latter bank, after the happening of the insolvency, - did not in fact owe the, Carnegie Trust Company the sum represented by the check in suit. The plaintiff now claims that no right to setoff ever accrued to the German Bank of Cincinnati, because the checks sent to that bank belonged to customers of the Carnegie Trust Company, and were sent to the Cincinnati bank merely for collection, whence it is argued that the German Bank never acquired title to such checks. This objection to the right of setoff is not presented by the pleadings nor the proof. On the contrary, the plaintiff admits (by not denying) that the checks - were owned by the Carnegie Trust Company. The judgment appealed from must be reversed, and since the essential facts are incapable of being changed upon a new trial the complaint must be dismissed, with costs to the appellant in all courts. Ingraham, P. J., McLaughlin, and Clarke, JJ., concurred; Laughlin, J., dissented.