Craighead v. Wells.

matures; or where time is agreed to be given and is actually given upon a debt overdue in consideration of the transfer of negotiable paper as collateral security therefor; or where the transferred note takes the place of other paper previously pledged as collateral secu. rity for a debt, either at the time such debt was contracted for or before it became due, in each of these cases the holder who takes the transferred paper before its maturity, and without notice, actual or otherwise, of any defense thereto, is held to have received it in due course of business, and in the sense of the commercial law, becomes a holder for value, entitled to enforce payment without regard to any equity or defense which exists between prior parties to such paper.

Upon these propositions there seems at this day to be no substantial conflict of author ity. But there is such conflict where the note is transferred as collateral security merely, without other circumstances, for a debt previously created. One of the grounds upon which some courts of high authority refuse in such cases to apply the rule announced in Swift v. Tyson is, that transactions of that kind are not in the usual and ordinary course of commercial dealings. But this objection is not sustained by the recognized usages of the commercial world, nor, as we think, by sound reason. The transfer of negotiable paper as security for antecedent debts, nothing more, constitutes a material and an increasing portion of the commerce of the country. Such transactions have become very common in financial circles. They have grown out of the necessities of business, and in these days of great commercial activity they contribute largely to the benefit and convenience both of debtors and creditors. Mr. Parsons, in his Treatise on the Law of Promissory Notes and Bills of Exchange, discusses the general question of the transfer of negotiable paper under three aspects one, where the paper is received as collateral security for antecedent debts. We concur with the author, that when the principles of the law merchant have established more firmly and unreservedly their control and their protection over the instruments of the merchant, all of these transfers (not affected by peculiar circumstances) will be held to be regular, and to rest upon a valid consideration.' 1 Pars. on Notes and Bills, 218 (2d ed.)

"Another ground upon which some courts have declined to sanction the rule announced in Swift v. Tyson is, that upon the transfer of negotiable paper merely as collateral security for an antecedent debt, nothing is surrendered by the indorsee - that to permit the equities between prior parties to prevail deprives him of no right or advantage enjoyed at the time of transfer; imposes upon him no additional burdens, and subjects him to no additional inconveniences.

"This may be true in some, but it is not true in most cases, nor, in our opinion, is it ever true when the note, upon its delivery to the transferee, is in such form as to make him a party to the instrument, and to impose upon him the duties, which, according to the commercial law, must be discharged by the holder of negotiable paper in order to fix liability upon the indorser.

"The bank did not take the note in suit as a mere agent to receive the amount due when it suited the convenience of the debtor to make payment. It received the note under an obligation imposed by the commercial law to present it for payment and give notice of non-payment in the mode prescribed by the settled rules of that law. We are of opinion that the undertaking of the bank to fix the liability of prior parties by due presentation for payment and due notice in case of non-payment — an undertaking necessarily implied by becoming a party to the instrument - was a sufficient consideration to protect it agains equities existing between the other parties, of which it had no notice. It assumed the duties and responsibilities of a holder for value and should have the rights and privileges pertaining to that position. The correctness of this rule is apparent in cases like the one now before us. The note in suit was negotiable in form, and was delivered by the maker for the purpose of being negotiated. Had it been regularly discounted by the bank at any time before maturity, and the proceeds either placed to the credit of Hutchinson & Ingersoll, or applied directly to the discharge, pro tanto, of any one of the call loans previously made to them, it would not be doubted that the bank would be protected against the equities of prior parties. Instead of procuring its formal discount Hutchinson & Ingersoll used it to secure the ultimate payment of their own debt to the bank. At the time the written agreement of July 22, 1873, was executed. by which this note, with others, was pledged as security for any debt then or thereafter held against them, the bank had the

Bank of Louisville v. First National Bank of Knoxville.

right to call in the $10,000 loan, that is, to require immediate payment. The securities upon which that loan rested had become in part worthless, and it is evident that but for the deposit of additional collateral securities, the bank would have called in the loan, or re. sorted to its rightful legal remedies for the enforcement of payment. It was, under the circumstances, the duty of the debtors to make such payment, or to secure the debt. It was important to them, and was in the usual course of commercial transactions, to furnish such security. If the bank was deceived as to the real ownership of the paper, or as to the purposes of its execution and delivery to Hutchinson & Ingersoll, it was because the railroad company intrusted it to those parties in a form which indicated that the latter were its rightful holders and owners, with absolute power to dispose of it for any purpose they saw proper.

“Our conclusion, therefore, is that the transfer, before maturity, of negotiable paper as security for an antecedent debt merely, without other circumstances, if the paper is so indorsed that the holder becomes a party to the instrument, although the transfer is without express agreement by the creditor for indulgence, is not an improper use of such paper, and is as much in the usual course of commercial business as its transfer in payment of such debt. In either case the bona fide holder is unaffected by equities or defenses between prior parties of which he had no notice. This conclusion is abundantly sustained by authority. A different determination by this court would, we apprehend, greatly surprise both the legal profession and the commercial world. Bigelow's Bills and Notes, 502 et seq.; 1 Daniel on Neg. Instr. (2d ed.) ch. 25, §§ 820 to 833; Story on Prom. Notes, §§ 186, 195 (17th ed.) by Thorndyke; 1 Pars. on Notes and Bills, 218 (2d ed.), § 4, ch. 6; and Redfield & Bigelow's Lead. Cas. on Bills of Ex. and Prom. Notes, where the authorities are cited by the authors."

BANK OF LOUISVILLE V. FIRST NATIONAL BANK OF KNOXVILLE.

(8 Baxt. 101.)

Agency — bank receiving draft for collection at a distance-action for negligence of sub-agent.

A bank receiving, for collection, a draft payable at a distant place, and trans mitting the same to a reputable agent at that place, is not liable for loss incurred by the negligence of the latter, and having voluntarily paid the claim of the payee, cannot maintain an action for such negligence against such agent. (See note, p. 695.)

A

CTION of negligence. The opinion states the case. The plaintiff had judgment below.

Cocke, Henderson & Tillman for plaintiff.

Webb & Taylor for defendant.

Baxter & Son for Brown.

DEADERICK, J. This is an action on the case brought in the Circuit Court of Knox county by the Bank of Louisville against

Bank of Louisville v. First National Bank of Knoxville.

the First National Bank of Knoxville and Charles H. Brown, to recover damages for the failure of said National banks and Brown, a notary public, to protest a bill of exchange sent by plaintiff to defendant, said National bank, whereby a loss resulted to plaintiff. The verdict and judgment were in favor of Brown and against the National bank, and both banks have appealed in error to this court.

The record shows that in August, 1870, the Leather Manufacturers' Bank of New York sent to the plaintiff for collection a bill of exchange for $927, dated June 1, 1870, payable three months after date, drawn by E. Simmerly in favor of Howes, Hyatt & Co., and accepted by W. B. C. & R. A. Smith, payable at the said First National Bank in Knoxville. The bill was transmitted by the Louisville Bank to the First National Bank, and received by it, on the 2d of September, 1870, and returned, unpaid, by said National bank on the next day without having been protested.

The cashier of the First National Bank testifies that he deliv ered the bill in question to defendant Brown, who was a notary public in good repute at the time, and in the absence of the presi dent temporarily employed as clerk in said bank, with two others, stating to him one was to be answered and two to be protested. By inadvertence the bill in controversy, which it was intended should be protested, was returned to plaintiffs by mail.

Upon these facts, the plaintiff being advised that it was responsible for the negligence of the First National Bank and the notary public, and liable to the bank in New York for the amount of the bill, upon demand made by said bank, paid the amount of the bill, and brought this suit to recover from defendants below.

The theory of the plaintiff is that the acceptors were insolvent, and by reason of the failure to protest and give notice to drawer a loss has resulted which it, as agent of the owner of the bill, was liable to make good, and did pay, and thereby became owner of the bill, with the right to sue and recover of defendants for their neg ligence, which occasioned the loss.

While for the defense it is insisted that plaintiff was not liable to the New York bank for the default or breach of duty by the First National Bank or the defendant Brown, and that they, if liable to any one, are liable for a tort to the owner of the bill, and that by a voluntary payment by plaintiff to the New York bank, no cause of action arises to plaintiff, nor can the cause of action originating in a tort be assigned.

Bank of Louisville v. First National Bank of Knoxville.

Plaintiff cites and relies upon the New York case of Allen v. Merchants' Bank, 22 Wend. 215, in which it was held by the court for the correction of errors that "a bank receiving for collection a bill of exchange drawn here upon a person residing in another State, is liable for any neglect of duty occurring in collection, whether arising from the default of its officers here, its correspondents abroad, or of agents employed by such correspondents."

This liability, it is held, may be varied, however, either by express contract or by implication arising from general usage in respect to such paper. It was accordingly held in that case by a majority of the court, where a bill of exchange was drawn in New York on a resident of Philadelphia, and was deposited in a New York bank for collection, and was transmitted by that bank to a Philadelphia bank, the notary of which was guilty of a neglect whereby loss accrued, that the New York bank was liable to the holder of the bill. This liability is imposed upon the ground of an implied undertaking by the bank receiving the bill for collection to take all necessary measures to charge the parties to the bill, and this holding has ever since been adhered to by the courts of New York, and has also been adopted in the State of Ohio.

On the other hand, the cases are numerous where the contrary doctrine has been held by the Supreme Courts of Massachusetts, Connecticut, Louisiana, Illinois, Wisconsin, Mississippi, Maryland, Pennsylvania, and other States. In these States, in reported cases, in some of which the doctrine established in New York by the case in 22 Wendell, is reviewed and disapproved, it is held that the more reasonable and just construction of the nature of the undertaking of the bank in which the bill is deposited for collection is, that where the bill is payable at another and distant place, the bank so receiving the bill discharges itself of liability by transmitting the same in due time to a suitable and reputable bank or other agent at the place of payment, and in such a case it is manifest that a subagent must be employed, and the assent of the principal is implied, as it cannot be said that the receiving bank was expected or bound to send one of its own officers to the distant point of payment, for the purpose of personally attending to the collection, for the very inadequate compensation usually paid to banks for such service. And this, we think, is the more equitable rule, and all that is required is, that the bank receiving such bill in the first place should act in good faith in the selection of a proper agent to protect the

Bank of Louisville v. First National Bank of Knoxville.

interests of the holder of the bill. Dorchester & M. Bk. v. N. E. Bank, 1 Cush. 186; Lawrence v. Bank, & Conn. 521; East Haddam Bank v. Scovil, 12 Conn. 303; Etna Ins. Co. v. Alton Bank, 25 Ill. 243; Citizens' Bank of Baltimore v. Howell, 8 Md. 530; Pars. Mer. L. 145, and note 2.

These and other cases, including the New York and Ohio cases, contra, are reviewed in Mr. Morse's Treatise on Banks and Banking, pp. 347 to 356, in which he concludes that the weight of authority is overwhelmingly in favor of the proposition that where a bank receives a bill for collection, payable at a distant point, it is so received with the knowledge and implied assent of the depositor that it is to be sent to the point of payment, and when this is done in good faith to a bank in good standing, and according to general usage, the transmitting bank is not liable for the default of the bank or agents to which the bill is sent.

If the bill were sent to a bank or other agent known to the transmitting bank to be unworthy of confidence, that would be an act of negligence and carelessness of the interests of the holder, for which it would be held liable. In this case the bill on its face showed that it was payable at the First National Bank at Knoxville, and the holder knew when it was transmitted to the Louisville Bank that it must of necessity be sent to the bank at which it was payable, and authority to so send it must be implied.

The Circuit judge instructed the jury in accordance with the doctrine laid down in the New York case of Allen v. Merchants' Bank, 22 Wend., 215, that a bank receiving a bill for collection and transmitting it to the point of payment is liable to the owner, and that the bank at the point of payment receiving such bill is liable to the bank transmitting to it, and that upon this principle the action was maintainable against the First National Bank by the Louisville Bank, and not maintainable by the Louisville Bank against Brown, who was liable, if at all, to the First National Bank of Knoxville, for negligence in the discharge of a duty intrusted to him by said last named bank.

From the principles announced in this opinion, it follows that the instructions given were erroneous. The First National Bank at Knoxville and Brown were the agents of the Leather Manufacturers' Bank, the hoider, and liable only to them for their default and negligence.

This is an action on the case for negligence, not a suit upon the