Amalgamated Sugar Co. v. United States Nat. Bank

HANFORD, District Judge (after stating the facts as above). [1] One or the other of the parties to this lawsuit must necessarily suffer a loss because of the insolvency of the first indorsee of the check, and the question as to which must bear the loss must be decided in accordance with their respective legal rights. The reasons are obvious and sufficient for holding that the insolvent bank did not acquire any proprietary right to the check which could be maintained against the defendant, if rights of a third party were not involved. The check, however, was negotiable paper, and the unrestricted indorsement thereof by the defendant, who was the drawer, payee, indorser, and real owner, warranted uninformed persons in receiving it, bona fide, as paper which the insolvent bank could rightfully dispose of. This case is easily distinguishable from the cases cited by counsel for. the plaintiff in error, of which Evansville Bank v. German American Bank, 155 U. S. 556, 15 Sup. Ct. 221, 39 L. Ed. 259, is a sample. ,In that case a draft was transmitted for collection to the Fidelity National Bank of Cincinnati, a few days before the insolvency of that bank became known to its patrons. The letter in which it was transmitted was similar to the letter in which the defendant’s check was transmitted to the plaintiff, but the indorsement on 'the draft was in the following words: “Pay Fidelity National Bank of Cincinnati, ’or order, for collection, for German American Nat’l Bank of Peoria, Ill’s.” That form of indorsement divested the draft of its negotiable quality, and the difference between that case and this one is as wide as the difference between negotiable and nonnegotiable instruments. The plaintiff had a legal and moral right to buy the check, and it is the opinion of this court that it did buy the check, and that the purchase was fully consummated before any of its officers or agents were apprised of the insolvency of the first indorsee or of the defendant’s ownership. If it had merely received the check, given credit for it by a book entry and passed it on to another bank for collection, without having given anything, in exchange, the case would be different, but by reason of the plaintiff’s relationship to the insolvent bank as its Portland correspondent and of their method of doing business with each other the plaintiff had a right to absorb and appropriate to its own use negotiable paper received from the insolvent bank in exchange for drafts paid and remittances made and debited to that bank in its current account, prior to notice of its insolvency, and, when the check was credited in that account, the amount of money which it represented was, in legal effect and actually, subtracted from the plaintiff’s assets and added to the assets of the insolvent bank. Commercial Bank of Pennsylvania v. Armstrong, 148 U. S. 50, 13 Sup. Ct. 533, 37 L. Ed. 363. ■ The whole argument in behalf of the defendant 'seems to be grounded upon an idea that the letter of transmittal from the insolvent bank constituted Ihe plaintiff a subagent and that, having received for collection and credit a check made payable to the defend [749] ant’s order, the subagent could not become a bona fide purchaser, for the reason that the circumstances mentioned were suggestive of possible rights of the defendant which an agent should protect and sufficient to put an ordinarily prudent person on inquiry, and therefore sufficient to charge the subagent with actual knowledge of the facts which would have been discovered by diligence. That idea is opposed to principles of commercial law established by decisions of the Supreme Court. Goodman v. Simonds, 20 How. 343, 15 L. Ed. 934; Murray v. Lardner, 2 Wall. 110, 17 L. Ed. 857; Smith v. Sac County, 11 Wall. 139, 20 L. Ed. 102; Hotchkiss v. National Bank, 21 Wall. 354, 22 L. Ed. 645; Commissioners v. Clark, 94 U. S. 278, 24 L. Ed. 59; Swift v. Smith, 102 U. S. 442, 26 L. Ed. 193; Stewart v. Lansing, 104 U. S. 505, 26 L. Ed. 866; Pana v. Bowler, 107 U. S. 529, 2 Sup. v. Ct. 704, 27 L. Ed. 424; King v. Doane, 139 U. S. 166, 11 Sup. Ct. 465, 35 L. Ed. 84. One of the rules deducible from this list of cases us that, in an action by an indorsee upon a negotiable instrument vitiated by fraud in its inception or issued without consideration, the plaintiff, to prevail, must prove affirmatively that he paid value. That fact being established, he will be entitled to recover unless it is proved that he purchased with actual knowledge of the defective title, or in bad faith, implying guilty knowledge, or willful ignorance. Circumstances which presumably would put a prudent buyer on inquiry are not enough, but to defeat an action by an indorsee of negotiable paper who obtained it in due course of business, before its maturity, and paid value for it, actual knowledge of facts sufficient to constitute a valid defense, if the action were prosecuted by the mala fide indorser, must be'proved affirmatively. This rule in all of its rigor was applied by this court in the case of the First National Bank v. Moore, 148 Fed. 953, 78 C. C. A. 581. In this case the element of fraud on the part of the insolvent bank in wrongfully disposing of the check in a manner to increase its own assets without giving value in exchange mdst be held to be wholly irrelevant to the issue to be determined, viz:, which one of two equally innocent parties shall bear the consequent loss. The parties before the court are equally innocent, for, if it be true that the plaintiff might have avoided the loss by an inquiry, it is also true that the defendant might have avoided the loss by making its indorsement of the check in a form which would have made the fraudulent conversion of it before payment a leeal impossibility. [2] The defendant insists that, in the event of the failure of its general defense, there should be a reduction of the plaintiff’s demand equal in amount to the credit balance in favor of the insolvent bank in its account with the plaintiff. This contention is advanced upon a theory that a fraud was committed by the receipt and disposal of the check by an insolvent, that springing from that fraud a trust attached to that balance, and that as the beneficiary'of that trust the defendant may, by right of subrogation, use said balance as a set-off. In answer to this contention, it is sufficient to repeat that the case must be de- • termined in accordance with the legal rights of the parties. Equitable •defenses cannot be admitted. It is the opinion of the court that the [750] plaintiff acquired a clear, legal, proprietary right to the check and the right to compel payment in full, and that the defendant has not pleaded nor proved any counter demand against the plaintiff cognizable in an action at law. Judgment affirmed.