Albany County Bank v. People's Co-operative Ice Co.

Chase, J.:

The question is presented by this appeal whether a bank which purchases in due course of business a promissory note of the payee therein named before maturity, and places the purchase price thereof to the credit of such payee and retains the same until after knowl *51 edge that, there is an entire failure of consideration for the note as between the maker and payee thereof, can subsequently give to the payee the proceeds of the note and retain the right to insist that it is a holder for value and protected from any defense existing between said maker and payee.

The question is here free from' any complication that may arise where such payee’s account is an activé one and the balance is materially changing from day to day. The evidence is undisputed that the proceeds of the note were deposited to the' payee’s account, and such proceeds of the note (except perhaps fifteen dollars thereof), and also si much larger amount remained on deposit with the plaintiff not only until the note was dishonored, but until long after the plaintiff brought this action, and so far as appears until long after defendant’s answer was served.

The Negotiable Instruments Law (Laws of 1897, chap. 612) provides:

“ § 96. * .* * A holder in due course holds the instrument free from any defect ojf title of prior parties and free from defenses available to prior parties among themselves, and may enforce payment of the instrument for the full amount thereof against all parties liable thereon;”

“ § 91. * * * A holder in due course is a holder who has taken the instrument under the following conditions:

“ 1. That it is complete and regular upon its face;

“ 2. .That he became the holder of it before it was overdue, and without notice that it had been previously dishonored, if such was the fact;

“ 3. That he took it in good faith and for value;

“ 4. That at the time it was negotiated to him he had no notice of .any infirmity in the instrument or defect in the title,of the person negotiating it.”

“§51. * * * Value is any consideration sufficient to support a simple contract. *.*"*”

u § 93. * * * Where the transferee receives notice of any infirmity in the instrument or defect in the title of the person negotiating the same before he has paid the full amount agreed to be ■ paid therefor, he will be deemed a holder in due course only to the extent of the amount theretofore paid by him.”

*52 A deposit by a bank of the proceeds of a note to the account of a customer is not of itself a payment' for the note. It is simply a promise by the bank to pay such proceeds to the customer by honoring his checks or drafts in the ordinary way pursued by banking institutions. The bank does not by such transaction transfer the title to any particular money to its customer. The bank becomes a debtor to the customer- to the amount of such credit.

It is said, by the Supreme Court of the United States in New York County National Bank v. Massey ( 192 U. S. 138, 145 ), “ It cannot be doubted that, except under special circumstances, or where there is -a statute to the contrary, a deposit of money upon general account with a bank creates the relation of debtor and creditor. The money deposited becomes a part of the general fund of the bank, to be dealt, with by it as other moneys, to be lent to customers, and parted with at the will of the bank, and the right of the depositor is to have this debt repaid in whole or in part by .honoring checks drawn against the deposits. It creates an ordinary debt, not a- privilege or right of a fiduciary character. (Bank of the Republic v. Millard, 10 Wall. 152 .) Or, as defined by Hr. Justice White in the case of Davis v. Elmira Savings Bank ( 161 U. S. 275, 288 ): ‘ The deposit of money by a customer with his banker is one of loan with the superadded obligation that the money is to be paid, when demanded by a check.’ (Scammon v. Kimball, 92 U. S. 362 .)”

The Court of Appeals in Ætna National Bank v. Fourth National Bank ( 46 N. Y. 82 ) says: “ The relation of banker and customer in respect to deposits is that of debtor and ■ creditor. When deposits are received they belong to the bank as a part of its general funds, and the banker becomes the debtor to the depositor ■ and agrees to discharge the indebtedness by paying the checks of the depositor, his creditor. The contract between the parties is purely legal and has no element of a trust in it.”

The rights of parties where a note has been discounted by a bank and the proceeds credited oh the books of the bank to the person from whom it was purchased has been repeatedly stated by text writers and by the court, from some of whom we quote as follows : Daniel on Negotiable Instruments (5th ed. § 779b) says: v“ The apparent purchase must have been a purchase in fact and not a \ *53 mere bookkeeping entry.— Mere discount and credit do not of themselves constitute a bona fide purchaser for value. To occupy that position the holder must actually have parted with something of value for the note. Thus, where a bank discounted a note for a company, and credited it with the amount, the credit, on account of other deposits, subsequently increasing, so that at the time of suit on the note the bank had actually paid nothing for it, it was held not a purchaser for value, and that its remedy was to tender the note back to the company and cancel the credit.”

In Eaton & Gilbert on Commercial Paper (p. 306) it is said: “ A bank by merely discounting a bill or note and placing the proceeds to the credit of the payee does not become a holder for value, but where the bank on the strength of such credit, has relinquished securities in its possession or made advances to or paid the checks of the payee it becomes a holder for value.”

In Cyclopedia of Law and Procedure (Vol. 7, p. 929) it is said: “ While the authorities are not entirely uniform upon the subject, it is fairly well settled that a bank, by discounting negotiable paper, placing the same to the credit of the depositor, and honoring his checks or drafts, surrendering to him securities, or in some other manner making advances and extending its credit on the faith of such deposit, thereby become a holder for value. But the mere discounting and crediting of the amount on the depositor’s account without making payment or incurring any increased obligations or liabilities is not sufficient.”

In American and English Encyclopaedia of' Law (Vol. 4 [2d ed.], p. 298) it is said : “ Where a bank discounts paper for a depositor who is not in its debt and gives him credit upon its books for the proceeds of such paper, it is not a bona fide holder for value, so as to be protected against infirmities in the paper, unless in addition to the mere fact of crediting the depositor with the proceeds of the paper, some'other and valuable consideration passes. Such a transaction simply creates the relation of debtor and creditor between the bank and the depositor; and so long as that relation continues and the deposit is not drawn out, the bank is held subject to the equities of prior parties, even though the paper has been taken before maturity and without notice.”

In Thompson v. Sioux Falls National Bank ( 150 U. S. 231 ) it *54 is said: “ The mere credit of a cheque 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 cheque he cannot become a bona fide holder by subsequent payment.”

In Central National Bank v. Valentine ( 18 Hun, 417 ) th¿ court sayq “The plaintiff by its president discounted the notes and gave the'makers credit on the books of the bank for the amount, no money was actually paid or thing of value parted with by the plaintiff upon the strength of the -indorsement or the discount. Under such circumstances the plaintiff cannot be regarded the bona fide holder of said notes for Value, as we understand the law a.s settled by the adjudications upon that subject. The mere giving of credit by entering the amount on the books and not actually parting with a dollar upon the strength of the indorsement, cannot be regarded parting with value in the sense which the law- contemplates. The parties in whose favor the credit was given might never draw or appropriate any portion of the fund.” -'

In Dykman v. Northbridge ( 80 Hun, 258 ) the court cited Central National Bank v. Valentine (supra), and referring to the facts in the Case before it, said: “ The bank could not become a holder for value of the note by crediting its amount to the cashier. Unless he received the money as an individual, and not as cashier, the bank parted with nothing as a consideration for the note.”

In Sixth National Bank v. Lorillard Brick Works Company, (46 N. Y. St. Repr. 235) the court,' referring to a note that had been discounted and the proceeds credited to the payee on the books of the bank, say: “ The plaintiff must have actually paid out and parted- with the proceeds of the discount before it, could acquire an indisputable title thereto.”

In Clarke National Bank v. Bank of Albion ( 52 Barb. 592 ) the court, referring to a check purchased by plaintiff of Ward & Bro., say : “ The credit of the avails of the check to Ward & Bro. on the books of the bank was in no sense a paying over. The sum agreed upon,as the price of the check was not by that act parted with and placed beyond the control of the plaintiff. * * * The plaintiff, upon receiving notice of dishonor, had an "undoubted right to erase *55 the credit as it did, and restored it only at the special instance of Ward & Bro. No argument can prove that the hank had, prior to notice of dishonor, parted with value for this check.”

From the authorities quoted it will be seen that a bank is not a holder of a note in due course as defined by the Negotiable Instruments Law when the proceeds of the note are simply credited to the person from whom it was purchased, and not paid out until the bank had notice of an infirmity in the instrument or defect in the title of the person from whom the note was purchased. Section 93 of the Negotiable Instruments Law seems to be declaratory of the law as uniformly stated in the decisions of this and other States. If it is conceded that the plaintiff had notice of an infirmity in the instrument in suit, or of defect in the title, of McCabe thereto, before it paid out the full amount agreed to be paid therefor, the defendant appellant was entitled to give evidence of its defense by the express terms of "the statute. .

The effect of notice of dishonor of a note is stated in Daniel on Negotiable Instruments (oth ed. § 782) as follows: “If it were not paid at maturity, it is then considered as dishonored; and, although still transferable in like manner and form as before, yet the fact of its dishonor, which is apparent from its face, is equivalent to notice to the holder that he takes it subject to its infirmities, and can acquire no better title than his transferrer. The doctrine applicable to this subject has been admirably stated by Chief Justice Shaw, who says: ‘ Where a negotiable note is found in circulation after it is due, it carries suspicion on the face of it. The question instantly arises, Why is it in circulation % Why is it not paid ? Here is something wrong. Therefore, although it does not give the indorsee notice of any specific matter of defense, such as set-off, payment or fraudulent acquisition, yet it puts him on inquiry; he takes only such title as the indorser himself has, and subject to any defense which might be made if the suit were brought by the indorser.’ ” Whether notice of dishonor of a note is alone sufficient in all cases to constitute notice of an infirmity in the instrument, or defect in the title of the person negotiating the same, is not necessary now to determine. The facts before the court, when it refused to allow the defendant appellant to produce evidence relating to its defense, were such that the evidence should have been received. The jhdg *56 meat should be reversed and a new trial granted, with costs to the appellant to abide the event.

All concurred, except Chester, J., dissenting.

Judgment' and order reversed and new trial granted, with costs to appellant to abide event.