Seligman v. Charlottesville Nat. Bank

BOND, Circuit Judge. The declaration i» this cause sets out that J. & W. Seligman &■ Co., of New -York, are bankers; tbat-on the-14th -day of May, 1875, B. C. Flanagan &■ Son made a proposition to the Charlottes-ville National Bank, in writing, to this effect : “In consideration of the guarantee of a letter of credit to the extent say of (£5,000>-five thousand: pounds sterling, to be issued by J. & W. Seligman &. Co., of New Yorlv we propose to deposit with the Charlottes-ville National Bank business paper to the extent of $35,000. . For snch amounts of said .letter of credit «a we may use, we proposer the bank shall discount of said paper at ’&• ¡ per cent,. a -sufficient amount to cover- the-amount-used--by . us, holding the balance, as-collateral security for same; the bank to re--ceive the money under the letter of credit, which is used in the discount aforesaid. It is further agreed that we will take the risk, as to any fluctuations in gold, so that the-difference in rate of interest between that charged ns and that paid by the bank shall, not be less than at the rate of 2 per cent., per annum-in. favor of the bank, the-bank; having the benefit of any fluctuations which; •may increase their profit.”. This proposition ,was accepted by the bank' by the following resolution of its boardr.-“Resolved, that the president and cashier-be and they are hereby authorized, in • accordance with the proposition submitted - toy B. C. Flanagan & Son to guarantee to-Messrs. J. & W. Seligman & Co. drafts drawn under their letter of credit, in favor-of B. C. Flanagan •& Son, to the extent of £5,000 on the deposit with the bank of business paper by Flanagan & Son as collateral security to the extent of $35.000.” The plaintiffs aver that in consideration of this acceptance of Flanagan & Son’s proposition by the bank, they gave to Flanagan ■ Son a letter of credit for £5,000, as follows r “No. 1023. New York, May 25,1875. Messrs. Seligman Bros., London. Sirs: We herewith beg to open with you a credit In favor-' of Messrs. B. C. Flanagan & Son, of Char-lottesville, Ya., for £5,000, of which they-wilt) avail themselves either in their own drafts- or the drafts of such parties as they. may accredit with you at four months after sight. You will please honor said drafts to the-above amount, advising us promptly of maturity. J. & W. Seligman & Co.” Flanagan & Son deposited the $35,000 business paper with the bank, and the bank, gave its written guarantee to Messrs. J. &: W. Seligman & Co., as follows: “In consid [1039] eration of one dollar; to .us in band paid, the receipt of which is hereby acknowledged, we guarantee to Messrs. J. & W. Seligman &. Co. the prompt and punctual payment of all sums and amounts due them under their letter-of credit No. 1023, for five thousand pounds sterling on the part of Messrs. -Flanagan .-& Son, and we hereby hold ourselves liable for the prompt and complete payment of.all amounts that may.so become due to them, and for the exact fulfilment of all the conditions mentioned in the annexed receipt: ‘New York, May 25, 1875. Bills receivable amounting to 535,089 ib/ioo have been. deposited with the Charlottesville National Bank by B. C. Flanagan & Son as collateral: vsecurity for the within-mentioned credit,. in accordance with the resolution-of the board of directors, adopted in full-board on 14th May, 1875.’ ” Which guarantee and receipt, are signed by the president and cashier of the bank. And the resolution further shows that Flanagan &,Son.gave. plain-; tiffs the following receipt: “New York, May 25, ’75. .-.Gentlemen: We have received today your, letter of .credit for £5,000 on--London in our favor, dated to-day. and in consideration thereof we hereby agree that whenever advised, of ■ a draft having been drawn under said credit we will receipt your draft, or reimburse -you upon your notifying us of the date when due, for the amount .of , said bills, payable in New York, twenty-one days before the maturity of the. bills in London, or, their equivalent in cash. We will allow you 2 per cent banker’s commission on the amount of drafts made -under . the ..above credit together with bill stamps, postage, etc., and deposit with’you the following collateral, which we authorize you to dispose of at your-discretion, in . the event of our non-compliance with the above terms. We further authorize you to cancel this letter of .credit at any time to the extent it shall not have been acted upon when notice of-revocation is received by the user. B. C. Flanagan & Son.” Drafts were drawn against the letter of credit, in accordance with the agreement, which were ultimately paid by plaintiffs, Flanagan having. failed to accept and pay the twenty-one day drafts spoken of in the receipt The bank failed and was placed in the hands, of a receiver by the comptroller of the treasury, and the plaintiffs allege that it is liable upon its above written guarantee for the amount-of Flanagan & Son’s draft remaining unpaid and held by them. To this declaration there is a demurrer; all errors in pleading are waived, and the question presented is, whether, upon the facts above set forth, the plaintiffs are entitled to recover. The case is free from many difficulties that have arisen in like cases. It is not a.contest against the corporation- itself pleading a want of power to make a contract from which it has derived no benefit, but which caused loss to others, such a defence having been justly held by many courts to.be as odious as the plea of the statute -of limitations on the part of -an individual debtor; but it is a contest between creditors claiming the same fund, where each party has the just right to contest the claim of the other in every legal manner. Nor is there any question of notice to parties, upon which many decisions in the bank cases depend. Here the transaction is in writing chiefly, and stands between the original parties to-day as it did the day it., was made. Tinder these circumstances we are to determine whether or not a national bank is authorized by the statute creating it to guarantee the paper of a customer for his accommodation; for this - is the real transaction set forth in the declaration. We will admit for the sake of the argument what plaintiffs’ counsel have urged at bar,, that a bank may borrow money to aid it» customers; but here the bank got no money; none of the money procured by the letter of credit was to go to it All the'bank had to expect was. the profit it was to . make from, the discount it received from the collaterals placed in its hands to secure It from loss by reason of the pledge of its credit to plaintiffs. The Flanagans were to give their own drafts to take up those drawn against the letter. They agreed what commissions the plaintiffs were to charge. The bank had nothing to do with the transaction except to see in the event of the failure of the-Flanagans that1 the plaintiffs were secure against loss. - What a national bank is authorized to do is defined by the statute of which it is the creature. The section of the statute applicable here is 5136 of the Revised Statutes. -By that section It is authorized to exercise -all such powers as are - incidental to banking, by discounting and negotiating-promissory notes, bills of exchange,' and other evidences of debt. But certainly there is no discounting of promissory note» set forth- in the declaration. The cause of action is the written guarantee of the bank. To discount a note is to deduct the interest in prsesenti and pay over in money the face value of the note to the holder. Here the bank parted with no money. To negotiate a promissory note is either to buy or sell it, and so with a bill of exchange. Here the bank neither bought nor sold any -bills of exchange. It agreed to guarantee Flanagan’s purchase of them from plaintiffs. By the same section the bank is allowed to lend money upon personal security; but it must be money that it loans, not its credit. Upon the deposit of the collater-als with the defendant by Flanagan, It loaned its credit to him to be used with plaintiffs. It is alleged, however, that the bank by reason of the powers granted to it incidental to banking, could enter into this contract. But the incidental powers given are not the incidental powers given generally to all [1040] banking institutions; but only sueb as are incidental to banks allowed to do sucb things as are prescribed by the statute,— such acts as are incidental to discounting and negotiating promissory notes and bills of exchange, and the loan of money on personal security, and the other acts of banking mentioned in the statute. We cannot see how this transaction can be brought within the powers of the bank granted by statute, and the demurrer must be sustained.