Waterloo Milling Co. v. H. Kuenster & Co.

Mr. Justice Bailey delivered the opinion of the court: The controlling question in this case is, whether the First National Bank and the Bank of New Hanover, of Wilmington, North Carolina, to which the defendants transmitted the drafts in question for collection, were, in making the collections and remitting the money, the agents of the defendants or of the plaintiff. It appears from the stipulation of the parties that the drafts were delivered by the plaintiff to the defendants with bills of lading attached, to be transmitted by the defendants to Wilmington for collection. No instructions were given by the plaintiff to the defendants as to the bank or agency in Wilmington to which the drafts should be sent, and all were sent in due time and with due diligence to these banks, all but the last two being sent to the First National Bank, and those two to the Bank of New Hanover. At the time the drafts were sent to these banks, respectively, the banks were each responsible and in good standing, their solvency then never having been called in question, and it is admitted that the defendants used due diligence in selecting these banks as the agencies for collecting the drafts and remitting the money. The drafts were all paid to the Wilmington banks in due course of business, but before the money collected was remitted to the defendants both banks failed, and the money, with the exception of certain sums paid over by the receiver of the First National Bank of Wilmington, was never received by either the defendants or the plaintiff. Where a draft upon a non-resident drawee is deposited with a local bank for collection, and especially where, as in this case, it is deposited to be transmitted to the place of residence of the drawee for collection, the bank fully discharges its duty by transmitting the draft, in due season, to a suitable agent at the place of residence of the drawee, with necessary instructions, and it is not liable for loss occasioned by the negligence or default of the collecting agent thus employed. Such collecting agent becomes the agent of the holder of the draft, and not of the bank with which it is deposited for collection. While some of the courts have been disposed to hold the bank in such cases to a higher degree of responsibility, the better reasoning, as well as the weight of authority, seems to support the rule as we have stated it, and that rule has long been recognized and adopted in this State. In Allen v. Merchants’ Bank, 22 Wend. 215, the stricter rule is held, but in a note to that case as it is reported in 34 Am. Dec. 315, by Mr. Freeman, it is said: “The preponderance is-against the principal case, and in favor of the rule that the liability of a bank taking a note or bill for collection which is payable at a distance, extends merely to the selection of a suitable and competent agent at the place of payment and to the transmission of the paper to such agent, with proper instructions, and that the corresponding bank is the agent, not of the transmitting bank, but of the holder, so that the transmitting bank is not liable for the default of the correspondent, where due care has been used in selecting the correspondent.” The foregoing statement of the rule by Mr. Freeman is quoted with approval in First Nat. Bank v. Sprague, 34 Neb. 318, and the rule itself is adopted. In Guelich v. National State Bank, 56 Iowa, 434, the reasons of the rule are stated as follows: “The course of business of defendant and all other banks is, in such cases, to make collections through their correspondents. They do not undertake themselves to collect the bills, but to indorse them to other banks at the place where payment is to be made. The holder of the paper, having full notice of the course of business, must be held to assent thereto. He therefore authorizes the bank with whom he deals to do the work of collection through another bank. The bank receiving the paper becomes the agent of the depositor, with authority to employ another bank to collect it. The second bank becomes the sub-agent of the customer of the first, for the reason that the customer authorizes the employment of such an agent to make the collection. The paper remains the property of the customer, and is collected for him. The party employed, with his assent, to make the collection, must therefore be regarded as his agent.” In Daly v. Butchers’ and Drovers’ Bank, 56 Mo. 94, the plaintiff was a depositor in the defendant’s bank, and deposited therein certain drafts in controversy in that case. The drafts were sent by the defendant to the National Bank of Vicksburg, which the defendant believed trustworthy, with directions to collect and remit. The Vicksburg bank collected the money and kept it, and became insolvent, and it was held that the defendant was not liable for the loss. The foregoing cases are entirely in harmony with the decision of this court in Ætna Ins. Co. v. Alton City Bank, 25 Ill. 221, in which it was held, that where a bill or note is received by a bank for collection which renders its transmission to another place necessary, the bank discharges its duty by sending it in due season to a competent, reliable agent, with proper instructions for its collection. There the legal holder of the bill indorsed and delivered it to the defendant bank for collection in the usual and regular course of banking business, and the defendant bank on the same day indorsed and transmitted it for collection to certain bankers in St. Louis, Missouri, the proceeds of the bill, when collected, to be placed to the credit of the Alton bank. By the negligence of the correspondent bankers in failing to have the bill protested for non-acceptance and to give notice of non-acceptance, the amount of the bill was lost, and it was held that the defendant bank was not liable. In discussing the case the court said (p. 224): “This presents the question whether the bank receiving such paper for collection is bound for the acts of their correspondents and are responsible for their negligence, or whether their undertaking requires anything more than that they should use reasonable care and prudence in the selection of a responsible correspondent to whom it shall be intrusted. That a bank receiving such paper for that purpose in the usual course of business' is bound to use ordinary and reasonable care in selecting an agent competent and responsible, there is no doubt, and a want of such precaution would clearly render it liable for consequent loss. It does not appear that there was any agreement on the part of the bank to become liable, at all events, for any loss that might occur from the acts of their correspondents, and the law has imposed no such liability.” See, also, Drovers’ Nat. Bank v. Provision Co. 117 Ill. 100; Fabens v. Mercantile Bank, 23 Pick. 332; Stacy v. Dane County Bank, 12 Wis. 629; Citizens’ Bank v. Nowell, 8 Md. 530; Laurence v. Stonington Bank, 6 Conn. 521; Third Nat. Bank v. Vicksburg Bank, 61 Miss. 112; Bank of Louisville v. First Nat. Bank of Knoxville, 8 Baxt. 101; Merchants’ Nat. Bank v. Goodman, 109 Pa. St. 422; Nyde v. Planters’ Bank, 17 La. Ann. 560; German Nat. Bank v. Burns, 12 Col-539; Bank of Lindsborg v. Ober, 31 Kan. 599; Mechem on Agency, sec. 514. In the light of these authorities it must be held that the First National Bank and the Bank of New Hanover, of Wilmington, North Carolina, were the agents of the plaintiff, and not of the defendants, and that the losses resulting from their default must be borne by the plaintiff, and not bjr the defendants. It appears, however, that on the 24th day of November, 1891, the First National Bank of Wilmington, after collecting the drafts forwarded to it, remitted to the defendants two drafts on the United States National Bank of the city of New York, aggregating $940.25, and failed and became insolvent the day following; that the defendants, on receipt of the drafts, not having received intelligence of the failure of the drawer, placed the amount of the drafts to the credit of the plaintiff and paid the same over to it, and that the money so paid has been retained by it; that the drafts themselves were immediately forwarded to New York for collection, and were there dishonored and protested, and that nothing was realized from them; that the defendants subsequently proved up their claim for the amount of the two drafts before the receiver of the First National Bank of Wilmington, and afterwards obtained from the receiver, by way of dividends on their claim, the sum of $625.92. They now claim, and have been permitted to recover by way of set-off, the difference between the amount of the dividends so received and the face of the drafts. This we think was proper. If the plaintiff had itself deposited these drafts with the defendants and received payment of their amount, the drafts being at the time worthless by reason of the insolvency of the drawer, there can be no doubt that the defendants would have had the right to charge back and recover the amount of the loss from the plaintiff. They were in fact received by the defendants from the First National Bank of Wilmington, which, for all the purposes of the transactions under consideration, is to be regarded as the plaintiff’s agent. The rights of the defendants would therefore seem to be the same as though the plaintiff had itself deposited the drafts with the defendants. Nor are we able to see that the case is at all affected by the circumstance that the defendants retained the drafts and proved up a claim for their amount before the receiver in their own name. They had paid the amount of the drafts to the plaintiff, and until the money so paid was refunded to them they were entitled to hold the drafts, and collect in their own name and for their own benefit whatever could be collected from the estate of the insolvent drawer, of course crediting whatever they might be able to collect upon their claim against the plaintiff. We are of the opinion that the judgment is fully warranted by the facts appearing by the stipulation' of the parties, and the judgment. of the Appellate Court will therefore be affirmed. Judgment affirmed.