In an action at law against a bank to recover on a cheque drawn
and issued by its cashier, if it be admitted that the cheque was
obtained without consideration and was invalid in the hands of the
immediate payee, the plaintiff must prove either that he was a
bone fide holder or that the person from whom he received
the paper had taken it for value without notice of defect in its
inception.
A bank, knowing that the county treasurer of the county had not
sufficient county foods in his hands to balance its official
accounts, consented to give him a fictitious credit in order to
enable him to impose upon the county commissioners, who were about
to examine his accounts. They accordingly gave him a "cashier's
check" for $16,571.61, which he endorsed and took to the
commissioners. They received it, but refused to discharge him or
his bondsmen, and placed the cheque and such funds as he had in
cash in a box and delivered them to his bondsmen. The latter
deposited the money and the cheque in another bank in the same
place, which bank brought suit against the bank which issued the
cheque to recover upon it.
Held:
(1) That the circumstances under which the cheque was issued
were a plain fraud upon the law and also upon the county
commissioners.
(2) That their receipt of it and turning it over to the sureties
was a single act, intended to assist the sureties in protecting
themselves, and was inconsistent with the idea of releasing them
from their obligation.
(3) That the question whether the evidence did or did not
establish the fact that the county was an innocent holder should
have been submitted to the jury.
This was an action brought by the Sioux Falls National Bank,
defendant in error, against the First National Bank, to recover the
amount of the following cashier's check, issued by an officer of
the defendant bank:
"No. 91 Sioux Falls, Dak., Jan. 12, 1886"
"
The First National Bank of Sioux Falls"
"Pay to the order of C. K. Howard, Co. Treas., sixteen thousand
five hundred and seventy-one and 61-100 dollars."
"$16,571.61. [Signed] W. F. Furbeck, Cash."
Page 150 U. S. 232
Across the face of this was printed "Cashier's check." It was
endorsed, "C. K. Howard, County Treasurer."
The complaint alleged in substance that the check was issued for
value received, delivered to Howard, endorsed by him, and that "it
came lawfully into the possession of the plaintiff, in the usual
course of business," on January 13, 1886, and that the "plaintiff
is now the legal owner and holder of the same."
The bank answered, admitting the drawing of the check, and
alleged in substance that the check did not come lawfully into the
possession of the bank in the usual course of business, and that
its acquisition by the bank was
ultra vires.
The action was begun January 14, 1886, two days after the check
was drawn, against the then sole defendant, the First National
Bank, and about six weeks thereafter, namely, March 1, an
attachment was issued, upon the ground that the defendant had or
was about to assign and dispose of its property with intent to
defraud its creditors, and levied upon the moneys, notes, drafts,
stock, and other assets of the bank, in the aggregate estimated
value of over $120,000. Of this property, the sheriff returned or
tendered to the defendant, on March 5, all, except assets of the
estimated value of $27,541.21, consisting of coin, notes, etc.
The issue of this attachment was followed by the failure of the
bank, and the Comptroller of the Currency appointed Thompson,
plaintiff in error, receiver, on March 11. On March 31, 1886, the
sheriff delivered to Thompson, as receiver, the assets remaining in
his hands, in the above amount of $27,541.21. Acting under advice
of the Comptroller, on December 28, 1886, the receiver applied to
the court for an order substituting him as party defendant in the
place of the bank, and the court thereupon made him an additional
party. The receiver excepted to the order, claiming the absolute
right of substitution.
Upon the trial, evidence was introduced tending to show the
following facts: on January 12, 1886, the date of the check,
Charles K. Howard was County Treasurer of the County of Minnehaha,
an office which he had held for several years, and
Page 150 U. S. 233
was having his semi-annual settlement as such county treasurer
with the board of county commissioners. From the time of its
organization to the date of this settlement, Howard had kept his
official deposit as treasurer with the First National Bank of Sioux
Falls, of which J. B. Young and H.L. Hollister, down to a short
time before the issue of this check, had been president and
cashier, respectively, and at the time of this settlement, Young
and Hollister, together with C. G. Coats and W. H. Corson, were the
sureties of Howard upon his official bond.
Howard was confessedly a defaulter -- that is, he had not funds
of the county sufficient to meet his liabilities -- and to enable
him to make his settlement with the commissioners, he had applied
to the defendant bank for assistance. After he had checked over his
accounts with the commissioners, he went to the defendant bank for
$16,571.61, the amount needed. He had about $12,000 on hand in a
box in the treasurer's vault, which, with the $16,571.61, would
balance his accounts. He had nothing deposited to his credit at the
bank. To make up the required amount, he gave the bank three drafts
upon Chicago, aggregating $15,000, telling the cashier, however,
that he had no credit there which would obtain the payment of them.
The bank thereupon gave him a deposit book, showing a deposit to
his credit of $15,625.01, which he exhibited to the commissioners,
who said that no doubt that was all proper, but they would like to
have some little further assurance that he had the money. He then
went to the bank, procured and exhibited to the commissioners a
letter, of which the following is a copy:
"
First National Bank, Sioux Falls, Dak.,"
"January 12, 1886"
"The books of the bank show a credit in favor of the county of
$15,625.01. If you wish, you have the privilege of examining the
books."
"R. J. Wells, P't."
"W. F. Furbeck, Cas."
Page 150 U. S. 234
The board would not make a settlement without the money or a
certified check. Howard returned to the bank, and asked the cashier
for a certified check, but was refused. The cashier thereupon gave
him the check in suit, with the condition that he would retain
possession of it, deliver it to no one, and return it in twenty
minutes, and would also place to the credit of the county in the
bank what money he had in his possession, as county treasurer, some
twelve or fourteen thousand dollars. This was after the closing of
the bank for the day's business.
Howard gave nothing for this check, nor was it charged to anyone
on the books of the bank. He did not return the check, nor make any
deposit whatever, but took it to the board of commissioners then in
session, and endorsed it at the request of the board. That, with
the county money he then had in his possession, was sufficient to
balance his account, and discharge his obligation to the county.
Thereupon Hollister, Coats, and Corson, three of the four sureties
upon his bond, through one Bailey, their attorney, demanded that
they be released from further liability upon Howard's official
bond.
On the following morning, namely, January 13th, the board of
county commissioners, deeming Howard's sureties insufficient for
the protection of the county because one of the sureties, Young,
had removed from the state, adopted a resolution requiring the
treasurer to furnish additional freehold sureties in the penal sum
of $50,000, and at the same time at the request of the three
remaining sureties, resolved that the funds presented to the board
of county commissioners by the treasurer in settlement of his
accounts be turned over to his bondsmen, and the bondsmen put in
charge of the office of county treasurer until the additional bond
was furnished, the funds to be deposited and remain the funds of
Minnehaha County.
The funds of the treasurer, including this check, were then
placed in a tin box and delivered into the hands of the bondsmen,
who took them in the box to the Dakota National Bank in the City of
Sioux Falls, and offered the same for deposit. In going to the
Dakota National Bank, they passed the First National Bank, which
was located on the opposite side of the street. The Dakota National
Bank refused to receive, give
Page 150 U. S. 235
credit, or purchase the check without the endorsement of the
bondsmen or indemnity from them. The check, was at the request of
the bondsmen, presented to the First National Bank for payment,
which was refused. The box containing the funds was left at the
Dakota National Bank by the bondsmen during the noon hour. While
the bondsmen and officers of the Dakota National were at dinner, or
soon after this, Bailey, on behalf of the bondsmen, called at the
plaintiff bank and had an interview with McKinney, its president,
in which Bailey said he had been engaged on behalf of the bondsmen
of Mr. Howard; that Young had left, and they wished to be released,
and that the office had been turned over to the bondsmen with the
money. In this conversation, McKinney expressed the wish to obtain
the deposit for his own bank. Prior to this conversation, he had
made some inquiries of different parties about the county
treasurer's deposit and about the settlement and the check, and had
asked if it was a straight cashier's check. Receiving a reply in
the affirmative, he said: "I would like to have it. They would
either pay it or close their doors." About 2 o'clock, the bondsmen
Hollister, Coats, and Corson went back to the Dakota National Bank;
took the box and money, including this check; went out of the back
door of the bank (which was in the same block and on the same side
of the street as the plaintiff bank), and, following along the
river bank behind the buildings which border the river, entered the
plaintiff bank through the back door, and passing through a sort of
storeroom to the directors' room or private office, back of the
main office, and in the presence of McKinney, emptied on the table
the contents of the box, saying, "I have brought you the deposit,"
or "here it is." McKinney and Hollister began counting the deposit
of $27,236.63, and, after the money was counted, the cashier, at
the suggestion of Bailey, made out a deposit book in the name of
"H.L. Hollister, C. G. Coats, and W. H. Corson, bondsmen," and
credited them with the amount of the funds. McKinney knew at this
time that these were the county funds, and that the depositors were
the treasurer's sureties, in charge of his office and funds while
he was getting an additional bond.
Page 150 U. S. 236
The check was not endorsed by the bondsmen, and they had no
account at that bank. Hollister endorsed several other checks
making up the deposit, but was not asked to endorse this one.
Bailey then said to McKinney: "That is a pretty good size check --
you had better go and get your money on it." McKinney said that he
would collect it, or see that their doors did not open the next
morning. Twice that afternoon, plaintiff presented the check to the
First National Bank for payment, which was refused upon the ground
that plaintiff had no right to the check, and that it was given
without consideration. In the evening, a conference was held at the
plaintiff bank between its officers and attorney and those of the
First National Bank, at which the plaintiff was again notified that
the check was without consideration, and had been fraudulently
diverted from the purpose for which it was issued, and was urged to
charge the same back to the bondsmen. This the plaintiff bank
refused to do, the plaintiff's cashier remarking that if the bank
did not pay it, they knew a way to make it.
The next morning, January 14, the plaintiff commenced this
action. On January 18, the board of county commissioners, having
found the treasurer's account correct, by resolution approved the
same, and thereupon Howard tendered his resignation as treasurer,
and C. L. Norton, cashier of the plaintiff bank, was appointed his
successor. On the next day, January 19, by further resolution of
said board, the bondsmen were required to turn over to the county
commissioners all the evidences of deposit and all funds belonging
to the county, and thereupon the check of the bondsmen in the sum
of $27,236.63, certified by McKinney, president of the plaintiff
bank, was accepted of the county commissioners in full discharge of
the bondsmen for the funds received of the county January 13, and
Norton, as county treasurer, receipted to the commissioners for
that sum of money in currency. Prior to taking possession of
Howard's funds and the check in suit by the county commissioners,
there was evidence tending to show that the board was notified by
one Wilkes not to take the check under consideration; that the
payment of the check would be resisted. This testimony was
disputed.
Page 150 U. S. 237
The case was removed for trial to Moody County, and the court,
upon motion of the plaintiff at the close of the defendant's
testimony, directed a verdict for the amount of the check, upon
which judgment was rendered by the district court for $18,417.24.
The case was appealed to the supreme court of the territory, where
the judgment below was affirmed, and the defendant sued out a writ
of error from this Court.
Page 150 U. S. 238
MR. JUSTICE BROWN, after stating the facts in the foregoing
language, delivered the opinion of the Court.
As the check in this case is admitted to have been obtained
without consideration and to have been invalid in the hands of the
immediate payee, the plaintiff, to sustain its own title, must
prove either that it was itself a
bona fide holder without
notice or that the county commissioners, of whom it received the
paper, had taken the same for value without notice of any defect in
its inception.
Lytle v. Lansing, 147 U. S.
59.
The circumstances under which the check was issued were a plain
fraud upon the law and also upon the county commissioners. It seems
that Howard kept his deposit as county treasurer with the defendant
bank, and had been personally
Page 150 U. S. 239
interested with it in different enterprises. He says that a few
days before his semi-annual settlement, he had a talk with Mr.
Wells, president of the bank, in which the latter agreed to assist
him in this settlement. He told them that it would take about
$15,0000 to make the settlement. He proposed to the cashier to give
him a note for the amount, but the cashier told him it would be
better to make some drafts to cover that amount of credit. He
thereupon made three drafts, aggregating $15,000, upon M. D.
Steevers & Co., of Chicago, who had before this honored his
drafts, at the same time telling the cashier that he had not the
proper credit to obtain payment of them. The bank thereupon gave
him a deposit book showing a balance of $15,625.01 on deposit. This
the board refused to accept, and demanded a certified check, which
the bank refused to give, but gave the cashier's check in suit.
At the time this check was issued, the bank had a capital stock
of $50,000, and if this check be regarded as a loan, as it must be,
it was in express violation of Rev.Stat. § 5200, which
provides that
"the total liabilities to any association, of any person, or of
any company, corporation, or firm for money borrowed, including, in
the liabilities of a company or firm, the liabilities of the
several members thereof, shall at no time exceed one-tenth part of
the amount of capital stock of such association actually paid
in."
The substance of the transaction was that the bank, with
knowledge that Howard had not funds of the county sufficient to
balance his accounts as treasurer -- in short, that he was a
defaulter -- consented to give him a fictitious credit in order to
enable him to impose upon the county commissioners. But the vital
question is whether the commissioners received this check in the
ordinary course of business, believing it to represent an actual
debt of the bank to Howard as county treasurer to the amount of the
check. To recover upon paper which has been diverted from its
original destination and fraudulently put in circulation, the
holder must show that he received it in good faith, in the ordinary
course of business, and paid for it a valuable consideration.
Wardell v. Howell, 9 Wend. 170;
Bank v. Noxon, 45
N.Y. 762.
Page 150 U. S. 240
By the Compiled Laws of Dakota, § 4487, "an endorsee in due
course" is defined as
"one who in good faith, in the ordinary course of business, and
for value, before its apparent maturity or presumptive dishonor,
and without knowledge of its actual dishonor, acquires a negotiable
instrument duly endorsed to him, or endorsed generally, or payable
to the bearer."
And by § 4739,
"good faith consists in an honest intention to abstain from
taking any unconscionable advantage of another, even through the
forms or technicalities of law, together with an absence of all
information or belief of facts which would render the transaction
unconscientious."
Applying the law thus stated to the facts of this case, it
appeared that before the check was presented, the county
commissioners had refused to receive a deposit book, as well as a
written statement of the bank that Howard had a credit to the
amount of $15,625.01 upon the books of the bank as a part of his
official assets, and demanded either the money or a certified
check, as they doubtless had a right to do. Indeed it is doubtful
whether the commissioners had a right to recognize anything but
current money in the settlement of the treasurer's accounts. By the
Compiled Laws of Dakota, § 1598, territorial warrants are
receivable for general territorial taxes, county warrants for
county taxes, city warrants for city taxes, school warrants for
school taxes, "but United States Treasury notes or their equivalent
only are receivable for such taxes as are or may be required by law
to be paid in cash." And by § 1656,
"if any county treasurer shall fail to make return, fail to make
settlement, or fail to pay over all money with which he may stand
charged at the time and in the manner prescribed by law, it shall
be the duty of the county clerk, on receiving instructions for that
purpose from the territorial auditor or from the county
commissioners of his county, to cause suit to be instituted against
such treasurer and his sureties,"
etc.
Now if the county treasurer had no authority to receive anything
but coin, Treasury notes, national bank notes, or other current
money, it is difficult to see what authority the county
commissioners had to accept anything less in the settlement
Page 150 U. S. 241
of his accounts. If they have the authority to accept checks and
other evidences of debt, where does that authority cease? May they
not also receive notes, drafts, bonds, or other obligations which
in their opinion may then or thereafter be good? As was said in
Cawley v. People, 95 Ill. 249, 256, speaking of the duty
of auditing boards:
"They are limited and controlled in their official acts, and
they are not, unless authorized, empowered to do or not to do
official acts. In this class of cases, they are empowered, and it
is enjoined on the board, to require sufficient bond from the
treasurer and to approve it. They have no power to dispense with
the duty, nor can they, without a proper consideration, release
sureties from their obligations under the bond. If they were to do
so in fraud of the rights of the people, the act would have no
binding effect and would be void. . . . There can be no question
that the treasurer could only discharge himself for county funds in
his hands by paying to the county, in money, county orders or jury
warrants. The statute requires him to pay in such funds. It is not
intended that he may pay in promissory notes, checks, drafts, and
other paper."
Indeed, it is doubtful whether the county commissioners, who,
under the laws of Dakota, are simply an auditing body, had any
authority to receive moneys of the county from the treasurer, for
which they gave no bonds, and whether their act in taking
possession of his assets, including this check, was not beyond the
scope of their authority. They did, however, receive the money and
the check, and at the same time, and as a part of the same
transaction, turned them over to the sureties upon his bond,
although they did not at that time or until six days thereafter
pass his accounts or release his sureties. What warrant they had
for turning over these securities to the bondsmen does not appear,
but there was evidently no intention on their part of releasing the
sureties, nor was the county placed in any worse position by that
act. If the commissioners had received this check believing it to
have been issued in good faith, and retained it, it is possible the
county might have stood in the position of an innocent purchaser.
But their receipt of it and their turning it over to the
sureties
Page 150 U. S. 242
was evidently a single act, and intended to assist the sureties
in protecting themselves. t was wholly inconsistent with the idea
of releasing them from their obligation.
Aside from the somewhat suspicious circumstances attending the
sudden production of a check of this large amount, which could
scarcely be said to be in the ordinary course of business, there
was evidence tending to show that about the time of the receipt of
the check, on January 12, Mr. Wright, the county attorney, was
informed by the counsel of the bank that the board should not take
the check into consideration; that the bank would defend against
it, as in the hands of Howard, and refuse payment, and that the
next day, when the board was in session, a similar notice was given
to them. It is true that some of this testimony with regard to the
notice is disputed, but in determining whether the case should have
been left to the jury or not, we are to consider only the
uncontradicted facts. Beyond this, however, there is some testimony
tending to show that the check was not delivered by Howard
voluntarily, as such delivery involved a plain violation of the
condition upon which he had received it, but was extorted by the
bondsmen and commissioners under a show of force. If this be true,
it was clearly not a receipt of the check in the ordinary course of
business. Be this as it may, it does not appear that the county
commissioners took any action prejudicial to their rights against
the county treasurer and his sureties until the 18th, when his
settlement was approved, and on the 19th, the check of the
bondsmen, certified by the president of the plaintiff bank, was
received in full discharge of such bondsmen.
Without expressing an opinion of our own whether the evidence
did or did not establish the fact that the county was an innocent
holder for value of this check, we are clear that the testimony
upon this point should have been submitted to the jury.
There was certainly evidence enough to go to the jury that the
plaintiff bank, as well as the sureties upon the bond, received the
paper with notice that its collection would be resisted. The
sureties received the paper simply as bailee for
Page 150 U. S. 243
the county. They paid no consideration for it. It simply passed
through their hands to the plaintiff bank, which consented to
receive it on deposit, and to credit them with the amount.
With regard to the possession of the plaintiff bank, the evident
anxiety of McKinney, its president, to obtain for it the
treasurer's deposit; his inquiry whether it was a straight
cashier's check; his threat that the bank should pay it or close
its doors; the substitution of Norton, the cashier of this bank,
for Howard, as county treasurer; the suspicious manner in which the
money was brought to the bank; the prompt commencement of the
action against the defendant on the morning after the check was
refused; the conversation on the following morning, the 15th,
between the assistant cashier of the plaintiff bank and the editor
of a local paper, in which the former said, "The Sioux Falls
National Bank has done a great deal for me, and now was the time
for me to stand by them; it was a matter of vital importance to
them," were all suspicious circumstances tending to throw grave
doubt upon the claim of the plaintiff bank to be a
bona
fide holder of the paper. Add to this the fact that twice
during the afternoon of the 13th, the plaintiff bank presented the
check for payment, which was refused upon the ground that it was
given without consideration and had been fraudulently diverted from
the purpose for which it was issued; that this notice was repeated
at a conference between the officers of the two banks the same
evening, and the plaintiff bank requested to charge it back to the
bondsmen, and it is too clear for argument that the plaintiff did
not itself stand in the position of an innocent holder. Bad as the
conduct of the defendant bank was in issuing the check, the
testimony is calculated to engender a strong suspicion that the
motive of the plaintiff bank in receiving it was to secure to
itself the deposit of the county moneys, and perhaps also to crush
out a rival institution.
While it is true the plaintiff bank credited the bondsmen with
the amount of the check on its receipt, it parted with nothing upon
the faith of it until nearly a week thereafter.
Page 150 U. S. 244
If it had cancelled the check on the evening of the 13th, as it
was requested to do, it would have done no more than the law
required of it. The mere credit of a check upon the books of a
bank, which may be cancelled at any time, does not make the bank a
bona fide purchaser for value. If after such credit, and
before payment for value upon the faith thereof, the holder
receives notice of the invalidity of the check, he cannot become a
bona fide holder by subsequent payment.
Dresser v.
Missouri &c. Construction Co., 93 U. S.
92;
Mann v. Second Nat. Bank, 30 Kan. 412;
Central Nat. Bank v. Valentine, 18 Hun. 417;
Manf.
Nat. Bank v. Newell, 71 Wis. 309;
Buller v. Harrison,
Cowp. 565.
The claim that defendant was estopped by its check to deny that
the bank was indebted to the county in the amount of such check
depends practically upon the same considerations as the question of
innocent purchaser. If, upon the faith of such representations, the
county commissioners did any act prejudicial to the interests of
the county, an estoppel might arise; but if, before such act was
done, the commissioners were informed that the check was
fictitious, they could not be said to have acted upon the faith of
its representation, and there could be no estoppel. Even if such
estoppel had arisen in favor of the county, it is at least doubtful
whether the plaintiff bank could avail itself of it.
Deery v. Cray,
5 Wall. 795;
Mayenborg v. Haynes, 50 N.Y. 675.
We have not deemed it necessary to consider whether this check
falls within the class upon which we have held that no action will
lie in favor of the holder against the drawee before acceptance.
Bank of Republic v.
Millard, 10 Wall. 152;
First Nat. Bank of
Washington v. Whitman, 94 U. S. 343;
Bull v. Bank of Kasson, 123 U. S. 105.
In any view we have been able to take of this case, we think the
question of plaintiff's title to this check and its right to
recover upon the same should have been left to the jury under
proper instructions.
The judgment of the court below is therefore reversed, and
the case remanded to the supreme court of the state of
Page 150 U. S. 245
South Dakota, with instructions to remand the case to the
proper court of Moody County and to direct the verdict and judgment
to be set aside and a new trial granted.
MR. JUSTICE BREWER dissented.
