Irwin v. Reeves Pulley Co.

Henley, J. The question for determination in this cause is this: Did the appellant in accepting for collection, in the ordinary course of business, the draft delivered to it by appellee, guarantee the solvency of the intermediate banks through which the said draft passed before it was finally presented to the drawee, and paid? It appears from the record that on the 10th day of July, 1893, appellee delivered to appellant, who was engaged in the general banking business at Columbus, Indiana, a draft for collection. This draft was drawn upon the Baker Iron Works of Los Angeles, California, was for the sum of $414.25, and was made payable to the order of appellee. At the time of the delivery of the draft to appellant, appellee indorsed it as follows: “Pay to W. G. Irwin, or order, for collection. Reeves Pulley Co.” Appellant, not having a correspondent in Los Angeles, transmitted the draft to its regular correspondent at Indianapolis, Indiana, the Indianapolis National Bank, for collection, indorsing the said draft as follows: “Pay E. E. Rexford, Cas., or order, for collection, and credit Irwin’s Bank of Columbus, Indiana. W. G. Irwin, Cashier.” Upon receipt of the draft from appellant, the Indianapolis National Bank transmitted it for collection to its correspondent at Los Angeles, California, by the following indorsement: “Pay State Loan & Trust Company or order, for collection, for the Indianapolis National Bank, Indianapolis, Indiana. E. E. Rexford, Cashier.” The State Loan & Trust Company presented the draft to the drawee and received — 103 — the full amount called for by it. Thus, it will be observed that in the usual course of business, the draft was presented to the drawee and paid. At the time the draft was so paid to the State Loan & Trust Company, the Indianapolis National Bank was indebted to said Trust Company in an amount greater than the amount of the draft, and the Trust Company credited the account of the Indianapolis National Bank with the amount so collected, and notified it of that fact. In the meantime, the Indianapolis National Bank suspended, went into the hands of a receiver, and no money or proceeds from said draft has ever come into the hands of appellant. It is upon these facts that appellee’s complaint is predicated, and upon which he seeks to hold appellant liable for the amount of the draft so deposited with appellant for collection. It is not shown or attempted to be shown in either paragraph of appellee’s complaint, that the appellant was negligent or did not exercise ordinary care in the selection of its correspondents, or that appellant knew, or in the exercise of ordinary care ought to have known of the insolvency of the Indianapolis National Bank, to which appellant, in the ordinary course of business, transmitted the draft in question for collection. The complaint, then, presents the naked legal proposition, upon the facts averred: Is the appellant the insurer of the solvency of the Indianapolis National Bank? The lower court overruled a demurrer to both paragraphs of the complaint. Appellant excepted, and has assigned the ruling as error to this court. Appellant answered in three paragraphs. The first paragraph of answer is as follows: “Answer. First paragraph: For answer to plaintiff’s complaint in the above entitled cause, defendant says: That for a longtime prior to and on the 10th day of July, 1893, he — 104 — has engaged in and doing a general banking business in the city of Columbus, Indiana, under the name and style of ‘Irwin’s Bank, Columbus, Indiana,’ and as a part of said bank’s business, as was its custom and course of dealing with all its regular customers, said bank undertook, for the accommodation of its said customers,to transmit, for collection, to banks at other points or places, drafts or other evidences of indebtedness on parties residing at such points or places, without other cost or charge than the expense which defendant would have to pay to the bank making such collections when sent to a point where defendant or its correspondent bank had no correspondent bank; and, when defendant had no correspondent bank at the point or place where collection was to be made, defendant would, unless otherwise directed, in order to save expense to its said customers, send the same to its most convenient correspondent bank, which in turn, had a correspondent bank at the point or place of collection. That prior to and on said 10th day of July, 1893, plaintiff was a regular customer of defendant’s said bank, and fully acquainted with defendant’s custom and manner of doing business as aforesaid, and had long acquiesced therein; and plaintiff well knew when the draft mentioned in plaintiff’s complaint was delivered to said defendant that the same would have to be transmitted to another bank or banks for collection. That on said 10th day of July, 1893, without any other direction, agreement or understanding than that implied from plaintiff’s knowledge of and acquiescence in defendant’s custom and course of dealing, as aforesaid, and from the knowledge on plaintiff’s part that said draft would have to be transmitted to another bank or banks for collection, plaintiff did deliver said draft to defendant’s bank to be transmitted for collection in the manner — 105 — aforesaid, and to facilitate such collection, indorsed thereon as follows: ‘Pay to W. G. Irwin, Cas.,,or order, for collection. Reeves Pulley Co.’ ” “That defendant had no correspondent bank at Los Angeles, California, the place where the drawee resided and where collection was to be made; and defendant’s most convenient correspondent bank, which in turn had a correspondent bank at Los Angeles, California, was the Indianapolis National Bank, at Indianapolis, Indiana; that accordingly and in order to save expense to plaintiff, as aforesaid, defendant transmitted said draft to said Indianapolis National Bank, to be by it transmitted to its correspondent bank at Los Angeles, California, and to facilitate collection thereof, defendant indorsed said draft as follows: ‘Pay-E. E. Rexford, Cas., or order, for collection, and credit Irwin’s Bank, Columbus, Indiana. W. G. Irwin, cashier.’ That said Indianapolis National Bank, in turn, at once transmitted said draft to its correspondent bank, the State Loan and Trust Company, a bank doing a general banking business at Los Angeles, California, and to facilitate collection thereof indorsed said draft as follows: ‘Pay State Loan and Trust Company, or order, for collection for the Indianapolis National Bank, Indianapolis, Indiana. E. E. Rexford, cashier.’ That said draft was paid to said State Loan and Trust Company on the 19th day of July, 1893, and credited on said day by said bank to said Indianapolis National Bank; that, at the time of said entry and credit upon the books of said State Loan and Trust Company, the said Indianapolis National Bank was its debtor to an amount in excess of the sum so credited; that said Indianapolis National Bank failed and went into the hands of a receiver as insolvent on the 24th day of July, 1893, and notice of said collection and credit, as afore — 106 — said was received by said Indianapolis National Bank on the 26th day of July, 1893. That at the time said draft was transmitted to said Indianapolis National Bank, said bank was generally supposed and reported in banking and commercial circles to be solvent and trustworthy, and defendant had no knowledge or information to the contrary, or reason to believe or suspect otherwise. That said Indianapolis National Bank still remains in the hands of a receiver, with its assets and liabilities yet unascertained; and that said State Loan and Trust Company still retains said sum so collected and credited, and claims the same as its own. Wherefore plaintiff ought not to recover.” Appellant’s second paragraph of answer differs from the first in this: That in addition to the facts averred in the first paragraph, it avers that appellant “undertook, for the accommodation of its said customers, and not otherwise, to collect by,transmitting for collection, and not otherwise,” and that appellant delivered said draft to appellant “for collection in the manner aforesaid and not otherwise.” The third paragraph of appellant’s answer is substantially the same as the first, except that it is therein alleged that appellant’s custom and course of dealing in undertaking to transmit for collection said draft in the manner in which the same was done, and without charge, to its regular customers, was and is the custom of banks generally, but does not charge appellee with knowledge of the custom. The lower court sustained a demurrer to each paragraph of appellant’s answer. Appellant excepted to the ruling of the court, and has assigned such ruling to this court as error. Appellant refused further to answer the complaint, and upon such refusal the court assessed appellee’s damages at $459.10, and rendered judgment in appellee’s favor for said amount. — 107 — The importance of the question herein involved is, we think, a sufficient excuse for the extended statement of the pleadings. It will be well to consider at the very threshold of the cause, the contention of appellee’s counsel, that the question discussed herein is not an open question for this court, the same having been settled in appellee’s favor by the Supreme Court of this State. With due regard for the opinion of appellee’s learned counsel, the writer is of the opinion that the question presented herein has never been before the Supreme Court of this State for decision. The cases which are cited by appellee’s counsel, to sustain their position, are, Tyson v. State Bank, 6 Blackf. 225; American Express Co. v. Haire, 21 Ind. 4; First Nat'l Bank v. First Nat'l Bank, 76 Ind. 561; Chapman v. McCrea, 63 Ind. 360; Pollard v. Rowland, 2 Blackf. 22; Abbott v. Smith, 4 Ind. 452. In. Tyson v. State Bank, supra, the negligence of the bank in not presenting the bill to the drawee for acceptance or payment was the breach for which the bank was held liable. The court deciding the case, speaking by Sullivan, J., said: “The State Bank, through its branch at Lafayette, agreed with the plaintiff, for a valuable consideration, to collect the bill described in the declaration. The plaintiff confided its interests to the prudence and fidelity of the bank. The defendant made no effort, as we learn from the declaration, to collect the bill. It was not presented to the drawee for acceptance or payment, consequently there was neither protest nor notice of its dishonor. For such negligence, the defendant is responsible to the plaintiff for the damages he has sustained.” The cases cited by the court in support of the opinion quoted from are all cited as to this point only. In American Express Co. v. Haire, supra, Perkins, — 108 — J., speaking for the court, said: “The main question in the cause is: Did the express company become liable to the holders for the amount of the bill on account of the failure to demand its payment on the proper day?” The answer to this question is briefly stated by the syllabus to the case, and covers the whole opinion, as follows: “If an express company receives for collection, for a compensation, a bill of exchange drawn in one state and payable in another, and delivers the same to a notary for demand and protest on the day before such demand and protest should be made, and such notary makes demand and protest one day before the maturity of the bill, whereby the drawers and endorsers are discharged, the acceptor being insolvent, the express company will be liable to the holder for the amount of the bill and interest.” In the last mentioned case, the bill of exchange never passed out of the hands of the express company to a correspondent or agent. The notary was the servant of the express company employed by it to fix the liability of the drawer and indorsers. This he failed to do, and on account of his negligence, the express company was held liable to the holder of the bill. In the case of First Nat’l Bank v. First Nat’l Bank, supra, the question involved in this appeal is not touched upon, but it is held in that case that the owner of a draft deposited for collection could recover the proceeds in the hands of the intermediate bank or subagent, and that “no objection can be successfully made on the ground of want of. privity.” The court, in sustaining its position, cites Morse on Banks and Banking, an authority confessedly against the position taken by appellee in this cause. The case of Chapman v. McCrea, supra, is almost identical with the case of Tyson v. State Bank, supra. In Chapman v. — 109 — McCrea- the facts were as follows: A promissory note, negotiable under the law merchant as an inland bill of exchange, was deposited before maturity in the bank, where the same was payable, by a bona fide indorsee for collection; but, on maturity of the note, which remained unpaid, the bank failed to protest the note and to notify the indorsee of its nonpayment. Shortly afterward the maker was adjudged a bankrupt, and the indorsee sued the bank for damages. It was held that the complaint averring such a state of facts was good upon demurrer. The bank was held for negligence, — a failure to perform a duty. The cases of Pollard v. Rowland, supra, and Abbott v. Smith, supra, were both cases where collections were placed in the hands of attorneys, who, without the knowledge or consent of the creditors, placed the collections in the hands of other attorneys. The attorneys with whom the collections were first placed were held liable for the default of the attorneys to whom they had intrusted the business. It will certainly not be contended that if an attorney who receives a note for collection and places the same in the hands of another attorney for collection, with, the knowledge and consent of the owner, that the first attorney will be held for the default of the second. The question presented by this appeal has not been decided by the Supreme Court of this State, but it has held, applying the doctrine to the case at bar, that there is no want of privity between appellee and the State Loan and Trust Company. First Nat’l Bank v. First Nat’l Bank, supra. The authorities which hold that the transmitting bank (appellant) is not- liable for the default of its correspondents, do so upon the ground that a collecting bank is an agent for transmission to a subagent to collect, and when this is properly done, and the sub110 agent has been selected with reasonable care, its duty is performed and its responsibility is at an end. Appellee must have known when he deposited the draft, drawn upon a resident of California, with appellant for collection, that appellant’s officers could not themselves present' the draft to the drawee for acceptance and payment, and appellant became the agent of appellee with full authority to employ the usual and necessary means for the proper execution of the agency. “It is a general principle that an agent’s authority is construed to embrace all the means usual and necessary for its proper execution. Accordingly, when the agent can show that the instructions of his principal could not have been properly executed without the employment of deputies, he will be warranted in delegating so much of his authority as the character of his agency demands.” 1 Am. and Eng. Ency. of Law (2nd ed.) 980; Evans on Agency (Ewell’s ed.) 44; Mechem on Agency, section 194; Story on Agency, section 201-214; Dun v. City Nat’l Bank, 58 Fed. 174; Wright on Agency, 55-56. There is no conflict of the authorities as to the law of agency as above set forth. What, then, is its application to the case at bar? Under the indorsement and delivery of the draft by appellee to appellant, did appellant become the agent of appellee for the collection of the draft? Was it necessary for the proper execution of this agency, if one was so created, that the agent should employ subagents? Was appellant charged with knowledge of the necessity of the employment of subagents wrhen he created the agency? Mechem, in his work on Agency, section 514, says: “The same conflict of authority exists as to the liability of a bank which receives, in the ordinary manner, a note or bill payable at a distant place, and sends it to its correspondent there for collection. It is well — 111 — established in New York that in such a case the correspondent bank is the agent of the bank from which it receives the paper, and not of the depositor or owner of the paper. The transmitting bank is, therefore, liable for the neglect or default of the corresponding bank in making the collection and transmitting the proceeds. This rule prevails, also, in Michigan, Ohio, New Jersey, Montana, Indiana, the supreme court of the United States, and in England. It is based upon the principle that the home bank having undertaken the collection of the paper stands in the attitude of an independent contractor who is left at liberty to select and does select his own agents and correspondents, and is, therefore, liable for their default. But in a majority of the states, however, a different rule prevails, and it is held that the liability of the home bank, in the absence of instructions or an agreement to the contrary, extends merely to the selection of a suitable and competent agent at the place of payment and the transmission of the paper to such agent with proper instructions. * * * This rule is based upon the theory that from the nature of the case there is implied authority, upon the ground of necessity, for the appointment of °a subagent, and that in this, as in other cases, the agent fulfils his duty when he uses dué care in the selection of the subagent.” As wre have shown, the author of the above quotation is in error so far as the statement concerning the position of the courts of Indiana is concerned, as is also recognized and stated in 3 Am. and Eng. Ency. of Law (2nd. ed), page 811, where it is said: “It is stated in several leading cases upon this subject * * * that the courts of Indiana have adopted the view that the forwarding bank is liable for the default if its correspondent. And in the cases of Tyson v. State Bank, 6 Blackf. 225, 38 Am. Dec. 139, and Amer — 112 — ican Express Co. v. Haire, 21 Ind. 4, 83 Am. Dec. 334, are relied upon to support the assertion. In neither of these cases, however, was the point under discussion raised or determined.” Upon the question of the agency of the forwarding bank, the court of appeals of New York, speaking by Mr. Justice Peckham, said: “The indorsement upon each piece of paper was for collection simply, and by virtue of that indorsement no title passed to the firm, but, on the contrary, it became simply the agent of the plaintiff to present the paper, demand payment thereof and remit it.” National Butchers & Drovers' Bank v. Hubbell, 117 N. Y. 384. In the case of Dun v. City Nat’l Bank, 58 Fed. 174, the court said: “It appears from the agreement that the services demanded by the principal — the obtaining of information — cannot be rendered by the agent, but must be mainly rendered by subagents. In such cases the agent will not be liable for the negligence or misconduct of his subagent, provided there was no negligence or misconduct in his selection. * * * When the business intrusted to an agent is to be performed at a distance, or requires or justifies the delegation of an agent’s authority to a subagent who is not his own servant, the original agent is not liable for the errors or misconduct of the subageht if he has used due care in his selection.” To the same effect see Barnard v. Coffin, 141 Mass. 37. Applying these principles to the case at bar leads to the proper solution of the .question presented herein. “When a draft, payable at a distant place, is left with a bank for collection, it must be presumed that it is intended to be transmitted to a subagent at the place where it is payable, and not that the bank is to employ its own officers to proceed there for the purpose of — 113 — obtaining payment.” 1 Am. and Eng. Ency. of Law (2nd ed.), 980. In 1 Morse on Banks and Banking,- page 487, it is said: “The parties to a contract are presumed to contract in reference to well established usage, in this particular as in others. The very question is whether the contract to collect can be fairly construed to be, by the understanding of the parties, an agreement that the first bank shall personally or by its servants do the collecting in the distant city, or whether, considering that the usage of trade is universal and well established to send the paper to some correspondent bank entirely independent of the first, and not its servant any more than a lawyer is the servant of his client, and considering that no compensation is taken by the first bank at all commensurate with such a risk as that of loss by negligence of subagents, is it not fairer to construe the contract intended to be simply one of transmission; and if so, then the question arises: Is there good reason on any other ground for extending the liability of the first bank beyond the consequences of its own lack of due care and that of its servants?” The case of Guelich v. National State Bank, 56 Iowa 434, 9 N. W. 328, is strongly in point. In the last mentioned case the court said: “The course of business of defendant, and all other banks, is, in such cases, to. make collections through 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 collecting through another bank. * * * The bank receiving — 114 — the paper becomes an agent of the depositor with authority to employ another bank to collect it. The second bank becomes the subagent 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.” The case of Allen v. Merchants’ Bank, 22 Wendell 215, 34 Am. Dec. 289, firmly established the doctrine, contended for by appellee, in the State of New York. The decision was by an almost evenly divided court, fourteen members being upon one side and ten upon the other. Mr. Freeman has this to say of the decision, in a note following the principal case: “The preponderance of authority is against the doctrine of 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 correspondent bank is the agent, not of the transmitting bank, but of the holder, so that the transmitting bank is not liable for the defaults of the correspondent, where due care has been used in making the selection of such correspondent. The rule adopted in the case of Allen v. Merchants’ Bank, supra, was adopted by the supreme court of the United States in the case of Hoover v. Wise, 91 U. S. 308, with Justices Miller, Clifford and Bradley dissenting. The same rule was adopted by divided courts in the states of New Jersey and Ohio, and while Michigan has adopted the same rule, an eminent member of the bar of that State, in his valuable work on — 115 — Agency takes strong ground against it, and concludes that it is against the great weight of authority in this country. Mechem on Agency, section 514. We do not believe it necessary to further quote from the decisions sustaining appellant’s contention in this cause. The following cases will be found in point and will, serve to show the wide range of the authority for the position taken in this opinion. We thus conclude that the acceptance of the draft to collect only binds the bank to the exercise of reasonable skill and ordinary diligence in making the collection and in the selection of its correspondents. Merchants, etc., Bank v. Stafford National Bank, 44 Conn. 565; Fabens v. Mercantile Bank, 23 Pick. (Mass.) 330; Third Nat’l Bank v. Vicksburgh Bank, 61 Miss. 112; Guelich v. National St. Bank, 56 Iowa 434; Bank of Louisville v. First Nat'l Bank, 8 Baxt. 101; Fifth Nat'l Bank v. Ashworth, 123 Pa. St. 212, 16 Atl. 596; Hum v. Union Bank, 4 Rob. (La.) 109; Wilson & Co. v. Smith, 3 How. (U. S.) 763; Lawrence v. Stonington Bank, 6 Conn. 521; Warren Bank v. Suffolk Bank, 10 Cush. (Mass.) 582; Planters’, etc., Bank v. First Nat’l Bank, 75 N. C. 534; Daly v. Butchers’, etc., Bank, 56 Mo. 94; Aetna Ins. Co. v. Alton City Bank, 25 Ill. 221; Drovers’ Nat’l Bank v. Anglo-American Packing, etc., Co., 117 Ill. 100, 7 N. E. 601; Stacy v. Dane County Bank, 12 Wis. 629; Citizens Bank v. Howell, 8 Md. 530; Merchants’ Nat’l Bank v. Goodman, 109 Pa. St. 422, 2 Atl. 687; Hyde v. Planters’ Bank, 8 Rob. (La.) 416; German Nat’l Bank v. Burns, 12 Colo. 539, 21 Pac. 714; Bank of Lindsborg v. Ober, 31 Kan. 599, 3 Pac. 324; Waterloo Milling Co. v. Kuenster, 158 Ill. 259, 43 N. E. 906; Farmers’ Bank v. Newland, 97 Ky. 464, 31 S. W. 38; First Nat’l Bank v. Sprague, 34 Neb. 318, 51 N. W. 846; Bank of Washington v. Trip — 116 — lett, 1 Pet. 25, decided by Marshall, C. J.; 1 Morse on Banks and Banking (3rd ed.), c. 17; Bolles on Bank Collections, c. 10. We must conclude, therefore, that when appellee placed the draft in appellant’s hands for collection, appellant became the agent of appellee for the collection and transmission of the draft, with implied authority to do whatever was reasonably necessary to accomplish the work; that appellant having exercised reasonable care in the selection of subagents necessarily employed to do the work, and seasonably transmitted the draft through such subagents to the place of payment, his whole duty has been performed. In the opinion of this court neither paragraph of the complaint states a cause of action against appellant; that the lower court erred in overruling the demurrer to each paragraph of the complaint, that the decision of the lower court is not only against the great weight of authority in this country upon the direct point at issue, but that it is contrary to the commonly accepted mercantile usages and customs,and violates the settled laws as applied to agents. Judgment reversed, with instructions to the lower court to sustain the demurrer to both paragraphs of appellee’s complaint.