Sowell v. Federal Reserve Bank, 268 U.S. 449 (1925)

U.S. Supreme Court

Sowell v. Federal Reserve Bank, 268 U.S. 449 (1925) Sowell v. Federal Reserve Bank of Dallas, Texas

No. 367

Argued May 1, 1925

Decided May 25, 1925

268 U.S. 449

ERROR TO THE CIRCUIT COURT OF APPEALS

FOR THE FIFTH CIRCUIT

Syllabus

1. An action brought on a promissory note by a federal reserve bank, a federal corporation, is an action "arising under the laws of the United States" within the meaning of Jud.Code § 24, "First" (a). P. 268 U. S. 453.

2. A federal reserve bank is not a national bank, subject to the provisions of Jud.Code § 24, "Sixteenth." Id.

3. The Assignee Clause, Jud.Code § 24, "First" (a), which forbids the district court to take cognizance of an action on a chose in action by an assignee which could not have been prosecuted in that court if no assignment had been made, applies where the sole ground of jurisdiction is diversity of citizenship, but not where the ground is that the action arises under the laws of the United States. Id.

4. Failure to present a promissory note for payment at the payee bank, where it was payable and where the maker had sufficient funds, or to give notice of dishonor, held not a defense to an action against the maker by the endorsee holder, in view of provision in the note waiving "protest, notice thereof, and diligence in collecting," and the Negotiable Instruments Law in Texas, giving effect to such provisions. P. 268 U. S. 456.

5. A note made to the order of a bank in which the maker had a deposit was endorsed by the payee to another bank as partial security for a larger indebtedness owed by the first bank to the second. The payee bank became insolvent, and the endorsee sued the maker on the note. Held that the maker was not entitled, merely in virtue of his equitable right of set-off as against the payee, to have the action stayed until the endorsee had exhausted other collateral held by it as security for the debt owed it by the payee -- at all events, not in the absence of the payee as a party. Id., .

294 F. 798 affirmed.

Error to a judgment of the circuit court of appeals affirming a judgment recovered in the district court by

Page 268 U. S. 450

the bank in an action against Sowell on his promissory note.

Page 268 U. S. 452

MR. JUSTICE STONE delivered the opinion of the Court.

Writ of error to the United States Circuit Court of Appeals for the Fifth Circuit to review its judgment, affirming a judgment for the plaintiff below of the district court of the United States for the Northern District of Texas, in an action upon a promissory note.

Plaintiff in error, defendant below, a resident of Texas, executed his promissory note payable to the order of a national bank domiciled in Texas. The note was indorsed, before maturity, to defendant in error, also domiciled in Texas, as collateral security for an indebtedness owing by indorser to defendant in error, in excess of the amount of the note. Three principal grounds of error are assigned: (1) that the district court was without jurisdiction as the plaintiff below was an indorsee of the note sued upon and as its indorser could not have brought suit upon the note against the maker in that court, Judicial Code, § 24, Subdivision First (c); (2) that defendant in error, as holder of the note, failed to present the note for payment at the indorser bank where it was payable and where the maker had funds on deposit sufficient to pay it; (3) that the district court refused to stay the suit until such time as the defendant should exhaust

Page 268 U. S. 453

other collateral held by it as security for the indebtedness of the indorser.

Suit being brought by a federal reserve bank, incorporated under the laws of the United States, it is a suit arising under the laws of the United States. Judicial Code, § 24, First (a); American Bank & Trust Co. v. Federal Reserve Bank of Atlanta, 256 U. S. 350. And as the defendant in error is not a national bank subject to the provisions of the Judicial Code, § 24, Subdivision Sixteenth, the district court had jurisdiction of the suit unless jurisdiction is excluded by the so-called "assignee clause," Judicial Code, § 24, Subdivision First (c), which reads as follows:

"No district court shall have cognizance of any suit (except upon foreign bills of exchange) to recover upon any promissory note or other chose in action in favor of any assignee, or of any subsequent holder if such instrument be payable to bearer and be not made by any corporation, unless such suit might have been prosecuted in such court to recover upon said note or other chose in action if no assignment had been made. . . ."

It is unquestioned that, where the sole ground of jurisdiction is diversity of citizenship, such jurisdiction is excluded by the operation of this clause, and the question now presented is whether the clause has a like effect where the sole ground of jurisdiction is that the suit arises under the laws of the United States.

No inference as to the meaning of the assignee clause can be drawn from its relative position in § 24, and that of the clause giving jurisdiction of suits arising under the laws of the United States. Judicial Code, § 295.

The history of the clause, however, shows clearly that its purpose and effect at the time of its enactment were to prevent the conferring of jurisdiction on the federal courts, on grounds of diversity of citizenship, by assignment, in cases where it would not otherwise exist, and

Page 268 U. S. 454

not to deprive the federal courts of jurisdiction where it was conferred on grounds other than diversity of citizenship.

The assignee clause was incorporated in the Judiciary Act of 1789, § 11, in substantially its present form. Under that Act, jurisdiction could be invoked only by the United States, aliens, and in cases of diversity of citizenship. There was therefore no scope for its application in cases where jurisdiction depended upon the subject matter of the suit. Jurisdiction in cases arising under the laws of the United States (except for a brief period under the Act of February 13, 1801, 2 Stat. 92, 93) was not conferred until the Act of March 3, 1875, 18 Stat. pt. 3, p. 470. Before that date, jurisdiction over suits brought by federal corporations was denied unless their charters expressly authorized them to sue in the federal courts. Where such authority was granted, the assignee clause was held to be inapplicable and not to defeat the jurisdiction. Commercial National Bank v. Simmons, 6 Fed.Cas. 226, No. 3,062; Bank of United States v. Planters' Bank of Georgia, 9 Wheat. 904. In that case, the Court, in holding that the Bank of the United States might bring suit on a note indorsed to it by a citizen of the same state as that of the defendant maker of the note, pointed out that the purpose of the assignee clause was to prevent extending the jurisdiction of the court by the mere process of assignment, and not to limit a jurisdiction conferred on other grounds. The Court said at page 22 U. S. 909:

"It was apprehended that bonds and notes, given in the usual course of business by citizens of the same state to each other might be assigned to the citizens of another state, and thus render the maker liable to a suit in the federal courts. To remove this inconvenience, the Act which gives jurisdiction to the courts of the Union over suits brought in by citizens of one state against the citizens of another restrains that jurisdiction where the suit is

Page 268 U. S. 455

brought by an assignee to cases where the suit might have been sustained, had no assignment been made. But the bank does not sue in virtue of any right conferred by the Judiciary Act, but in virtue of the right conferred by its charter. It does not sue because the defendant is a citizen of a different state from any of its members, but because its charter confers upon it the right of suing its debtors in a circuit court of the United States."

Mr. Justice Story applied the same rule in the case of a claim assigned to the United States, holding that the assignee clause was not applicable (United States v. Greene, 4 Mason 427), resting his decision both on the meaning and effect of the assignee clause and on the effect of the Act of 1815, Chap. 253, conferring general jurisdiction on the federal courts over suits brought by the United States.

By the Act of 1875, 18 Stat. 336, jurisdiction of the federal courts was extended generally to all suits arising under the laws of the United States. Where such is the ground of jurisdiction, the assignee clause appears to us to be inapplicable, just as it had been held to be in cases in which the like jurisdiction was conferred by special corporate charter provisions or where jurisdiction was given generally over suits brought by the United States.

The precise question seems not to have been expressly passed upon by this Court since the Act of 1875. It, however, was necessarily involved in Wyman v. Wallace, 201 U. S. 230, in which the assignee clause would have defeated the jurisdiction attaching because of diversity of citizenship, but in which the jurisdiction was, nevertheless, upheld because the case was one arising under a law of the United States.

We think that a reasonable interpretation of the language of the clause in the light of its history, its obvious purpose at the time of its enactment, and judicial declarations as to its meaning and effect, and the fact that the provision for jurisdiction generally over suits arising under

Page 268 U. S. 456

the laws of the United States was enacted later, and without any exceptions, lead to the conclusion that it should be so applied as not to limit jurisdiction arising from the nature of the subject matter of the suit, as is the case in suits brought by or against corporations organized under the laws of the United States. American Bank & Trust Co. v. Federal Reserve Bank, supra, p. 256 U. S. 356. We hold that the district court had jurisdiction over the cause.

The note sued on contained a provision that the maker waived "protest, notice thereof and diligence in collecting." The Negotiable Instruments Law in force in Texas gives effect to stipulations waiving presentment, protest, or notice of dishonor, contained in the body of the instrument, and provides that they are binding on all parties to it. (Revised Statutes, Texas, § 82, Art. 6001-a(3), 109, 110, 111.) Plaintiff in error was therefore bound by his waiver, and the circumstance that defendant in error had knowledge of a deposit of the plaintiff in error with the payee bank sufficient to meet the note at maturity did not, contrary to the express terms of the waiver, impose a duty on defendant in error to present the note for payment. Defendant's rights were unimpaired by its failure to make due presentation of the note or to give notice of its dishonor.

The contention of plaintiff in error that suit should have been stayed until defendant in error had exhausted its other collateral is not founded upon any special equities growing out of fraud, agreement among the parties, or suretyship, or other special relationship, giving rise to any equity in the maker of the note. The note was held by defendant in error, together with other collateral, as security for the debt of the payee who is insolvent and indebted to plaintiff in error in an amount exceeding the note. In such a situation, there is no scope for the marshaling of the security at the behest of the maker of the note. The equitable doctrine of marshaling

Page 268 U. S. 457

rests upon the principle that a creditor having two funds to satisfy his debt may not, by his application of them to his demand, defeat another creditor, who may resort to only one of the funds. The debtor may not ordinarily invoke the doctrine, for, by doing so he, would disregard the express provisions of his contract on which the creditor is entitled to rely. The plaintiff in error is bound to pay his obligation according to its tenor. He cannot deny his own contract merely because his creditor has acquired other rights with which he may satisfy his debt and because he wishes to avail himself of an equitable set-off against the payee of the note. Had plaintiff in error set up any defense to the note, good as to the payee, such as fraud, or failure of consideration, he might, under the law of some jurisdictions, have urged such cases as McBride v. Potter, 169 Mass. 7, or Second National Bank v. McGehee, 241 S.W. 287, or Van Winkle, etc., Co. v. Citizens' Bank, 89 Tex. 147, as a basis for the claim that, because of his special equities affecting the inception of the note, the defendant in error should exonerate him by resorting to the other collateral, if shown to be sufficient to pay the note.

But plaintiff in error shows only the obligation of his note, presumptively valid both in the hands of the payee and the defendant in error, and claims that, since he has an equitable set-off good against the payee of the note, he should be relieved of his own obligation until the collateral of the payee bank has first been applied to its satisfaction. But these circumstances, which do not in any way affect the validity of negotiable paper as such, can afford no foundation for equitable relief to the maker, or for depriving the creditor of the full benefit of his security in accordance with his contract. To engraft upon the note the equity here asserted against an innocent holder would be to disregard its terms and impair its negotiability. Such authority as there is rejects it. Hanesley v.

Page 268 U. S. 458

National Park Bank, 147 Ga. 96; Haas v. Bank of Commerce, 41 Neb. 754; Citizens' Bank v. Giddings, 60 Neb. 709; Third National Bank v. Harrison, 10 F. 243. And see 15 U. S. Laird, 2 Wheat. 390; Myer v. Kendall, 142 La. 361. In any event, the other debtor of defendant in error was not before the court, and for that reason plaintiff was not entitled to the relief sought. Dorr v. Shaw, 4 Johns, Ch. 17-18.

There is no error in the record, and the judgment of the circuit court of appeals is

Affirmed.