Where T. deposited with C., his broker, coupon railroad mortgage
bonds, as margin for purchases of stocks, and C. pledged the bonds
to a national bank in 1874, as its customer, as collateral security
for any indebtedness he might owe to the bank, and afterwards the
bank paid and advanced for C. money on the faith of the bonds, and
on like faith certified checks drawn on it by C., when C. had not
on deposit in the bank moneys equal in amount to the checks:
held, under the Act of March 3, 1869, c. 135, 15 Stat.
335, now § 5208 of the Revised Statutes, that although the
certifications were unlawful, the checks certified were good and
valid obligations against the bank.
The pledge of the bonds with the bank by C. was a valid
contract, and entirely aside from the certifications, and the title
of the bank to the bonds was not impaired by the
certifications.
Where the provisions of the National Banking Act prohibit
certain acts by banks or their officers without imposing any
penalty or forfeiture applicable to particular transactions which
have been executed, their validity can be questioned only by the
United States, and not by private parties.
This is an action brought by John B. Thompson, in the supreme
court of the State of New York against the Saint Nicholas National
Bank of New York, a national banking association. The complaint
alleged that on the 18th of April, 1874, the plaintiff was the
owner of 73 mortgage bonds of $1,000 each, of the Jefferson,
Madison and Indianapolis Railroad Company, and 20 mortgage bonds of
$1,000 each, of the Indianapolis, Bloomington and Western Railroad
Company, of the value of $150,000; that on or about that date, the
defendant became wrongfully and illegally possessed of the bonds,
and that before the suit was brought, the plaintiff demanded from
the defendant the possession of them, but the defendant refused to
deliver up any portion thereof.
The answer of the defendant set up that at the time named in the
complaint, and for a long time before, Capron & Merriam,
bankers and brokers in the City of New York, were
Page 146 U. S. 241
customers of, and regular depositors with, the defendant, and
kept a large account in its bank; that it was the custom of Capron
& Merriam to procure call loans, advances, and discounts from
the defendant, for the benefit of themselves and also of their
customers, and they pledged to the defendant, as collateral
security for such loans, advances, and discounts, various bonds,
stocks, and commercial paper, under an agreement on their part that
in case they should be at any time indebted to the defendant for
money lent or paid to them, or for their use, in any sum, the
defendant might then sell, in its discretion at the brokers' board,
public auction, or private sale, without advertising and without
notice, any and all collateral securities and property held by the
defendant for securing the payment of such debt, and apply the
proceeds to that object; that the bonds specified in the complaint
were a part of the securities so pledged by Capron & Merriam to
the defendant; that the defendant at the time of such transactions
did not have any knowledge in respect to any person interested in
such loans or in said securities except Capron & Merriam, and,
the latter having failed to pay such loans on proper demand, the
defendant proceeded to sell and dispose of said securities pursuant
to such agreement, and gave to Capron & Merriam credit for the
net proceeds thereof, and that there still remained due to the
defendant on account of such loans and advances, after such credit,
a large balance.
The plaintiff having died, and his executors having been
substituted as plaintiffs, the case was tried at a circuit of the
supreme court before a jury, which, under the direction of the
court, found a verdict for the defendant. The exceptions of the
plaintiffs, taken at the trial, were heard in the first instance at
the general term of the supreme court, on a case made by the
plaintiffs, containing the exceptions. A motion for a new trial was
made thereon before the general term, and was denied, with an order
that the defendant have judgment against the plaintiffs upon the
verdict, with costs. Such judgment was entered, the principal
portion of the opinion of the general term being reported in 47
Hun. 621. The plaintiffs then appealed to the Court of Appeals,
which affirmed the
Page 146 U. S. 242
judgment, and remitted its own judgment to the supreme court,
where a final judgment was entered against the plaintiffs. The
opinion of the Court of Appeals is reported in 113 N.Y. 325. The
plaintiffs have brought a writ of error.
The 93 bonds in question were all coupon bonds, payable to
bearer. The testator of the plaintiffs delivered them to Capron
& Merriam, who were his brokers, as margin for purchases of
stock by them for his account. Capron & Merriam pledged the
bonds to the defendant, they being its customers, as collateral
security for the repayment of any indebtedness which might exist at
any time to it on their part. That pledge was made under a written
agreement, dated December 2, 1873, and signed by Capron &
Merriam, which read as follows:
"We hereby agree with the St. Nicholas National Bank of New
York, in the City of New York, that in case we shall become or be
at any time indebted to said bank for money lent or paid to us or
for our account or use, or for any overdraft, in any sum or amount
then due and payable, the said bank may, in its discretion, sell at
the brokers' board or at public auction or private sale, without
advertising the same and without notice to us, all, any, and every
collateral securities, things in action, and property held by said
bank for securing the payment of such debt, and apply the proceeds
to the payment of such indebtedness, the interest thereon, and the
expenses of the sale, holding ourselves responsible and liable for
the payment of any deficiency that shall remain unpaid after such
application."
Afterwards the defendant paid and advanced for Capron &
Merriam large sums of money on the faith of the bonds and of such
other securities as it held for their account. They failed in
business on April 20, 1874, owing the defendant $71,920.17, for
checks certified by it and outstanding, and for money paid by it up
to the close of business on April 18, 1874. On April 20, 1874,
before the defendant heard of such failure, it paid $210 more,
making a total debt of $72,130.17, which remained unpaid. No notice
or claim as to the ownership of the 93 bonds by the testator of the
plaintiffs came to the defendant until May 5, 1874. The bonds came
into the possession of the defendant before it made the
Page 146 U. S. 243
certifications of checks for the account of Capron &
Merriam, which were made on April 18, 1874, and the certifications
were made on the faith of the deposit of the bonds and of the other
securities which the defendant held for the account of Capron &
Merriam. The defendant used its best efforts to procure as large a
price as possible for all the securities which had been pledged to
it by Capron & Merriam, including the 93 bonds, but after
crediting to Capron & Merriam the entire proceeds of sales,
there was a deficiency on their debt to the defendant of about
$1,800. No payment on account of such deficiency, and no tender or
offer of any kind in respect to said bonds, was ever made to the
defendant by the testator of the plaintiffs. This action was not
commenced until April 18, 1880, six years after the bonds came into
the possession of the defendant.
At the trial, the plaintiffs asked the court to direct a verdict
for them on the ground that the contract of certification of the
checks by the defendant was void because it was unlawful, being a
certification of checks drawn by Capron & Merriam when they had
no money on deposit to their credit with the defendant, and the
defendant could not hold the 93 bonds as against such unlawful
certification, and on the further ground that the defendant did not
take the bonds in the ordinary course of business.
Page 146 U. S. 247
MR. JUSTICE BLATCHFORD delivered the opinion of the Court.
The federal question thus involved is the only one which we can
consider on this writ of error. It arises under the Act of March 3,
1869, c. 135, 15 Stat. 335, which was the statute in force on April
18, 1874, and read as follows:
"It shall be unlawful for any officer, clerk, or agent of any
national bank to certify any check drawn upon said bank unless the
person or company drawing said check shall have on deposit in said
bank at the time such check is certified an amount of money equal
to the amount specified in such check, and any check so certified
by duly authorized officers shall be a good and valid obligation
against such bank, and any officer, clerk, or agent of any national
bank violating the provisions of this act shall subject such bank
to the liabilities and proceedings on the part of the Comptroller
as provided for in section fifty of the national banking law,
approved June third, eighteen hundred and sixty-four."
13 Stat. 114, c. 106. The provisions of that § 50 were that
the Comptroller of the Currency might forth with appoint a receiver
to wind up the affairs of the banking association. The provisions
of the Act of March 3, 1869, are now embodied in § 5208 of the
Revised Statutes.
In regard to the federal question involved -- namely the
certification of checks by the defendant for Capron & Merriam
without having on deposit an equivalent amount of money to meet
them, and the contention that the defendant did not become a
bona fide holder of the bonds in virtue of payments made
in pursuance of the agreement with that firm -- the Court of
Appeals remarked in its opinion, given by Ruger, C.J., that the
statute of the United States affirmed the validity of the contract
of certification and expressly provided the consequences which
should follow its violation; that the penalty incurred was
impliedly limited to a forfeiture of the bank's charter and the
winding up of its affairs; that it was thus
Page 146 U. S. 248
clearly implied that no other consequences were intended to
follow a violation of the statute, and that it would defeat the
very policy of an act intended to promote the security and strength
of the national banking system if its provisions should be so
construed as to inflict a loss upon the banks, and a consequent
impairment of their financial responsibility. The court then cited,
to support that view,
National Bank v. Matthews,
98 U. S. 621;
National Bank v. Whitney, 103 U. S.
99, and
National Bank of Xenia v. Stewart,
107 U. S. 676.
The Court of Appeals further said that it was of opinion that
the statute in question had no application to the question involved
in this suit, which concerned only the relations between Capron
& Merriam and the defendant; that, by the deposit of the bonds,
the former secured the promise of the defendant to protect their
checks of a certain day for a specified amount; that the
certification of the checks was entirely aside from the agreement
between Capron & Merriam and the defendant, and was a contract
between the defendant and the anticipated holders of the checks;
that Capron & Merriam had received the consideration of their
pledge when the defendant agreed with them to honor their checks,
and that would have been equally effectual, between the parties,
without any certification; that the certification was simply a
promise to such persons as might receive the checks that they
should be paid on presentation to the defendant, in accordance with
its previous agreement with Capron & Merriam; that the legal
effect of the agreement was that the defendant should loan a
certain amount to Capron & Merriam, and would pay it out on
their checks to the persons holding such checks; that it was
entirely legal for the defendant to contract to pay Capron &
Merriam's checks, and it did not affect the legality of that
transaction that the defendant also represented to third parties
that it had made such an agreement and would pay such checks; that
Capron & Merriam could not dispute their liability for the
amount paid out in pursuance of such agreement, nor could any other
party, standing in the shoes of Capron & Merriam; that the fact
that the defendant, in connection with the agreement to
Page 146 U. S. 249
pay such checks, had also promised third parties to pay them,
could not invalidate the liability previously incurred, or impair
the security which had previously been given to the defendant upon
a valid consideration; that the fact of the certification was
entirely immaterial in respect to the liability incurred by Capron
& Merriam to the defendant; that there was no evidence
impairing the title to the bonds acquired by the defendant through
the transfer of them to it by Capron & Merriam; that the
purpose for which the bonds were transferred by the testator of the
plaintiffs to Capron & Merriam contemplated their transfer and
sale by the latter to third persons; that the defendant acquired a
valid title to them by their transfer to it; that the transaction
between Capron & Merriam and the defendant was in the ordinary
course of business pursued by the latter; that it received the
bonds in good faith, for a valuable consideration, and within all
the authorities this gave it a good title to the bonds; that it was
authorized to deal with them for the purpose of effecting the
object for which they were transferred to it; that its right to
hold the bonds continued so long as any part of its debt against
Capron & Merriam remained unpaid; that the testator of the
plaintiffs could at any time have established his equitable right
to a return of the bonds, and could have procured their surrender,
by paying the amount for which they were pledged, but he refrained
from doing so, and impliedly denied any right in the defendant by
demanding the unconditional surrender of the bonds, and that he
never became entitled to such surrender, and, of course, was not
authorized to recover possession of them. We regard those views as
sound, and as covering this case.
The agreement of December 2, 1873, between Capron & Merriam
and the defendant, did not call for any act violating the statute.
There was nothing illegal in providing that the securities which
the bank might hold to secure the debt to it of Capron &
Merriam should be available to make good such debt. The statute
does not declare void a contract to secure a debt arising on the
certifications which it prohibits.
In addition to that, the statute expressly provides that a
Page 146 U. S. 250
check certified by a duly authorized officer of the bank, when
the customer has not on deposit an amount of money equal to the
amount specified in the check certified, shall nevertheless be a
good and valid obligation against the bank, and there is nothing in
the statute which expressly or by implication prohibits the bank
from taking security for the protection of its stockholders against
the debt thus created. There is no prohibition against a contract
by the bank for security for a debt which the statute contemplates
as likely to come into existence, although the unlawful act of the
officer of the bank in certifying may aid in creating the debt. In
order to adjudge a contract unlawful as prohibited by a statute,
the prohibition must be found in the statute. The subjection of the
bank to the penalty prescribed by the statute for its violation
cannot operate to destroy the security for the debt created by the
forbidden certification.
If the testator of the plaintiffs had pledged the bonds to the
defendant, he could not, after receiving the defendant's money,
have replevied the bonds, and after possession of the bonds had
been given by him to Capron & Merriam, and after they had been
subsequently taken by the defendant in good faith, neither he nor
his executors can set up the statute to destroy the debt.
This construction of the statute in question is strengthened by
the subsequent enactment, on July 12, 1882, of § 13 of the act
of that date, c. 290, 22 Stat. 166, making it a criminal offense in
an officer, clerk, or agent of a national bank to violate the
provisions of the Act of March 3, 1869. This shows that Congress
only intended to impose, as penalties for over certifying checks, a
forfeiture of the franchises of the bank, and a punishment of the
delinquent officer or clerk, and did not intend to invalidate
commercial transactions connected with forbidden certifications. As
the defendant was bound to make good the checks to the holders of
them because the act of 1869 declares that the checks shall be good
and valid obligations against the defendant, it follows that Capron
& Merriam were bound to make good the amounts to the defendant.
It necessarily results that the defendant, on paying the
checks,
Page 146 U. S. 251
was as much entitled to resort to the securities which Capron
& Merriam had put into its hands as it would have been to apply
money which they might have deposited to meet the checks.
Moreover, it has been held repeatedly by this Court that where
the provisions of the National Banking Act prohibit certain acts by
banks or their officers without imposing any penalty or forfeiture
applicable to particular transactions which have been executed,
their validity can be questioned only by the United States, and not
by private parties.
National Bank v. Matthews,
98 U. S. 621;
National Bank v. Whitney, 103 U. S.
99;
National Bank of Xenia v. Stewart,
107 U. S. 676.
The bonds in question came into the possession of the defendant
before it certified the checks. They were not pledged to it under
any agreement or knowledge on its part, or, in fact on the part of
Capron & Merriam, that subsequent certifications would be made.
The certifications were made after the pledge, and created a debt
of Capron & Merriam to the defendant, which arose after the
pledge. The agreement of December 2, 1873, applied and became
operative simultaneously with the certifications, but independently
of them, as a legal proposition.
In
Logan County Bank v. Townsend, 139 U. S.
67,
139 U. S. 77,
decided in March, 1891, after the present case was decided by the
Court of Appeals of New York, this Court approved the decision in
National Bank v. Whitney, 103 U. S.
99, and said that a disregard by a national bank of the
provisions of the act of Congress forbidding it to take a mortgage
to secure an indebtedness then existing, as well as future
advances, could not be taken advantage of by the debtor, but "only
laid the institution open to proceedings by the government for
exercising powers not conferred by law."
Judgment affirmed.
