Moreland v. Peoples Bank

Sykes, J., delivered the opinion of the court. The appellee bank .instituted suit in the circuit court of Wayne county against David Moreland and Rufus P. Cook upon a.promissory note for three hundred and fifty dollars payable to the order of the said bank and signed by the two appellants. The appellant Moreland filed a special plea in the case, admitting the execution of the note, but claiming: That he signed the note merely as surety for his codefendant, Cook, which fact was known to the bank. That the defendant Cook had an account with the bank which continued until the maturity of the note and for some time thereafter. That on the date of the maturity of the note Cook had on general deposit to his credit in the bank the sum of two hundred, fifteen dollars and sixty-six cents, and at various times thereafter had money to his credit in said bank. A copy of this bank account is attached to the special plea and shows that at several different times after the maturity of the note the said Cook had on deposit in the bank an amount in excess of the amount owed the bank on said note. That-the bank went into liquidation on the 19th day of November, 1914, which was- before the institution of this suit. That the defendant Moreland had no notice that this note had not been paid until after the bank went into liquidation. That the bank by virtue of having the money on deposit to the credit of the defendant Cook became a trustee of this money and held it as a trust fund, and that it was the duty of the bank to have appropriated these funds, or so much of them as was necessary to the payment of this note. That the note was made payable at the bank and was in its possession, which was tantamount to a -draft on the bank to pay the same out of the funds on deposit to the credit of the said Cook. That the bank — 210 — knew that Cook’s account with it varied by overdrafts for large amounts and that the said Cook was likely to become wholly insolvent at any time and defeat any contribution by the defendant. That, because of all these reasons, it was the duty of the bank under the circumstances to protect the defendant Moreland who was a surety, and that, because of the alleged negligence and bad faith in not so doing, the bank has relinquished ¡and released the defendant Moreland from any liability on this note. The bank demurred to this special plea, alleging in its demurrer: First, that the plea was not sufficient to release the defendant Moreland; also, that the plea shows affirmatively that the defendant Cook did not have at the time of the maturity of the note a ¡sufficient sum on deposit with the plaintiff to liquidate said note; and, further, that the plaintiff bank was never under any legal obligation to apply any of the funds on deposit with it to the credit of the said Cook to the payment of the note sued on. This demurrer was sustained by the court. There were also two other pleas filed by the defendant to which demurrers were sustained. The defendant declining to plead further, judgment was entered in favor of the bank for the amount due on the note, from which judgment this appeal is prosecuted. In this court the only error argued by the appellant is the action of the court below in sustaining the demurrer to the special plea ' above mentioned. It is the contention of the appellant that, while the note is signed by Cook and Moreland on its face as comakers, as a matter of fact, and one which the plea alleges, Moreland was only a surety of Cook, and as " such surety was released when the bank failed to apply the amount to Cook’s credit on deposit in bank on the day the note fell due to the payment of this note. It is the contention of the appellee that the appellant Moreland is not a surety but a principal on the note, and further that, even if he be considered a surety, then he was not released by the failure of the bank to apply any amount — 211 — Cook might have had on deposit in the hank to this note on the day of, or after, its maturity. It is not necessary for us to pass upon the question of whether or not the appellant Moreland was a principal or a surety, because we are of the opinion that, even if he he treated as a surety, he was not released from his liability on this note because of the failure of the bank to credit the note with any amount Cook may have had on deposit with it on the day of its maturity or thereafter. The decisions of the various states differ as to whether or not a hank is under any duty to a surety to credit a note at the day of, or after, its maturity with any amount the principal of said note may have on general deposit in the bank. A careful examination of the authorities on this question leads us to believe that the great weight of authority is to> the effect that the bank is under no duty whatever to the surety to make any such application. A majority of the decisions holding the contrary view hold 'that at the time of the maturity of the note, if the principal of the note have on deposit an amount equal to or greater than that called for in the note, then it is the duty of the hank to apply a sum sufficient to pay the note in full; that, if it fails to do this, then the surety on said note is released. These cases further hold, however, that, if the amount on deposit the day of the maturity of the note is not sufficient to satisfy the note in full, then the hank is under no duty to the surety whatever to apply pro tanto to a credit on the note the amount on deposit in said bank at that time. There are a few states which hold that it is the duty of the hank to apply whatever amount it has on hand at the maturity of the note and also whatever amount it may have on deposit at a later date to a payment on the note. It is well settled that the hank itself has a right, if it- so desires, to apply whatever amount the maker of the note has on deposit with it to a payment on the note. Or, in other words, the hank itself has the right — 212 — to set off the amount it owes the depositor against the amount owed it by the'depositor. The relation existing between a bank and a depositor is simply one of debtor and creditor. Most of the authorities holding that the surety is discharged in this character of cases predicate this right on the fact that the bank has this right of set-off if it so desires. As one court expressed it: “When a creditor has in his hands the means of paying his debt out of the property of his principal debtor, and does not use it, but gives it up the surety is discharged. ’ ’ Because the principal of the note has on deposit funds in the bank in no way gives the bank a lien on these funds for the payment of dts note. If it did, then it would be the duty of the bank to hold all funds deposited there before the maturity of the note as well as those deposited at and after its maturity. As is well settled, by virtue of these deposits the relation only of debtor and creditor exists. This deposits is not treated as a trust fund or anything of that nature. The’ bank, by failing to credit the note with any amount due the principal, in no way releases any security which it holds or any valuable right of any kind to which the surety could be subrogated. .It is a well-known fact in the commercial world that many customers of banks have balances to their general credit on deposit with the bank and at the same time owe the bank large sums of money for which they have given notes with sureties, falling due at different times. It would seriously interfere with the banking business and would be an injustice to the banks and to their depositors, if the bank, before cashing their checks, should always be compelled to consult their books and notes to see if any notes of these depositors were falling due on that date with sureties thereon, thereby to keep from releasing these sureties. On the other hand, it is the dnty of the. .surety to know when th(e note of his principal falls due, and, if he so desire, to take proper steps to see that he — 213 — is protected at that time. In addition to whatever common-law remedies sureties have, they, have statutory remedies under chapter 112 of the Code of 1906. In the case of National Mahaiwe Bank v. Peck, 127 Mass. 298, 34 Am. Rep. 368, the court said: “Money deposited in a hank does not remain the property of the depositor, upon which the bank has a lien only; but it becomes the absolute property of the bank, and the bank is merely a debtor to the depositor in an equal amount. (Citing cases.) So long as the balance of' account to the credit of the depositor exceeds the amount of any debts due and payable by him to the bank, the bank is bound to honor his checks, and liable to an action by him if it does not. When he owes to the bank independent debts, already due and payable, the bank has the right to apply the balance of his general account to the satisfaction of any such.debts of his. But if the bank, instead of so applying the balance, sees fit to allow him to draw it out, neither the depositor nor any other person can afterwards insist that it should have, been so .applied. The bank, being the absolute owner of the money deposited, and being a mere debtor to the depositor for his balance of account, holds no property in which the depositor has any title or right of which a surety on an independent debt from him to the bank can avail himself by way of subrogation, as in Baker v. Briggs, 8 Pick, 122, 19 Am. Dec. 311, and American Bank v. Baker, 4 Metc. [Mass.] 164, cited for the defendant. The right of the bank to apply the balance of account to the satisfaction of such a debt is rather in the nature of a set-off, or of an application of, payments, neither of which, in the absence of express agreement or appropriation, will be required by the law to be so made as to benefit the surety.” This idea has been very well expressed in the ease of People’s Bank of Wilkes-Barre v. Legrand, 103 Pa. 309, 49 Am. Rep. 126: — 214 — “While it is true'that a bank is á mere debtor to its depositor for the amount of his deposit, and therefore, in an action by the bank against the depositor, on a note upon which he is liable, the latter may set off his deposit, yet we do not think the bank is bound to hold a deposit for the protection of an indorser of the depositor. A bank deposit is different from an .ordinary debt, in this, that from its very nature it is constantly subject to the check of the depositor, and is always payable on demand. The convenience of the commercial world, the enormous amount of transaction by means of bank checks, occurring on every business day in all parts of the country, require that the greatest facilities, should be afforded for the use of bank deposits by means of checks drawn against them. The free use of checks, for commercial purposes would be greatly imp ailed, if the banks could only honor them on peril of relieving indorsers, without an investigation of the state of the depositor’s liabilities upon discounted paper .. . . It is beyond question that the bank, in the absence of any special appropriation of the deposit by the depositor, would have the right to apply a general deposit to the payment of any existing, matured indebtedness of the depositor. But that privilege is a right which the bank may or may not exercise in its discretion. , . .We fully recognize the rule that, where a principal creditor has the means of satisfaction actually or potentially within his grasp, he must retain them for the benefit of the surety; but we regard the case of bank deposits as an exception to the rule.” In the case of First National Bank v. Peltz, 176 Pa. 513, 35 Atl. 218, 36 L. R. A. 832, 53 Am. St. Rep. 686, in speaking of this same subject, the court uses the following language: “While money deposited becomes the property, of the bank, yet that result flows from the nature of money, which is to be measured by amount and not by physical identity. Hence a deposit of one hundred dollars is re — 215 — turned by another one hundred dollars without regard to the - identity of the notes, or the coin, because legally they are the' same. Except for this characteristic, a deposit of money' to be returned on demand would be, like the deposit of any other article, a mere bailment. But though for this reason the title to money deposited passes to the bank, yet the whole business of banking is founded on the faith of‘ the immediate availability of the'deposit, as money, for the use of the depositor, and, any rule that interferred with the- freedom of action of either bank or customer, by -compelling a stop of their dealings with each other to examine the regulations of other parties to the deposit, would go far towards destroying that instant convertibility which is the essence of the business.” This question was ably and exhaustively considered in the opinion of the court in the case of Davenport v. State Banking Co., 126 Ga. 136, 54 S. E. 977, 8 L. R. A. (N. S.) 944, 115 Am. St. Rep. 68, 7 Ann. Cas. 1000, in which opinion all the leading authorities are reviewed and discussed. There are found in 115 Am. St. Rép. and 8 L. R. A. (N. S.) exhaustive notes to this case discussing and reviewing al] of the authorities. We therefore conclude that a bank does not owe a surety on a note the duty to apply, or credit, the note with any amount the principal may have on deposit in the bank at, or after the maturity- of the note, whether or not this amount be sufficient to satisfy the note. The appellant in his brief contends that, because of the allegations in his special plea to the effect that the defendant R. P. Cook was likely to become wholly insolvent at any time and defeat an action for contribution] then this is equivalent to charging that he was insolvent at the time of the maturity of the note, and that the bank knew of his insolvency, and because of this insolvency it was the duty of the bank to have applied whatever amount it owed Cook to this note. This is not an allegation of insolvency. This allegation — 216 — might be made of any one: It is therefore not necessary for ns to consider the question of whether or not, if the defendant Cook had been insolvent at the time of the maturity of the note, and this fact had been known to the appellee bank, this would have made any difference in the duty of the bank. The lower court was correct, in sustaining the demurrer, -and its judgment is therefore affirmed. A firmed.