German Nat. Bank v. Carnegie Trust Co.

[1] The plaintiff and the Carnegie Trust Company had a reciprocal arrangement whereby each made collections of checks and drafts for the other; the plaintiff in Cincinnati and its vicinity, and the Carnegie Trust Company in New York and vicinity. The correspondence between the plaintiff and the Trust Company, as well as the testimony of the vice president of the Trust Company, shows that the plaintiff was required to transmit daily to the Trust Company the amount of the items sent to it by the Trust Company for collection, irrespective of whether they had been collected, and the court below found that “upon the receipt of the checks and drafts from the Carnegie Trust Company the plaintiff became indebted to the Carnegie Trust Company for the sum represented by said checks and drafts.” This finding is fully justified. The evidence shows that items transmitted by the Trust Company to the plaintiff had been deposited by the Trust Company’s customers in their respective accounts, not for collection merely, but for credit. The Carnegie Trust Company thus became the owner of those checks and drafts. Met. Nat. Bank v. Loyd, 90 N. Y. 530 ; Cragie v. Hadley, 99 N. Y. 131 , 1 N. E. 537 , 52 Am. Rep. 9 ; Jaffe v. Weld, 155 App. Div. 110 , 139 N. Y. Supp. 1101 , affirmed in 208 N. Y. 593 , 102 N. E. 1104 ; Lyons v. Un. Ex. Nat. Bank, 150 App. Div. 493 , 135 N. Y. Supp. 121 . And when the plaintiff received the checks and drafts, and before collecting them, sent its check daily to the Trust Company for the amount of the checks, it became the owner of the checks. It was quite well understood between the plaintiff and the Trust Company that the proceeds of these checks would be mingled with the general funds of the plaintiff. If that is so, then under the special arrangement made between the parties the plaintiff became a debtor to the Trust Company to the. amount of the checks. Morse on Banks and Banking, § 248; N. B. & D. Bank v. Hubbell, 117 N. Y. 384 , 22 N. E. 1031 , 7 L. R. A. 852 , 15 Am. St. Rep. 515 ; People v. City Bank of Rochester, 93 N. Y. 582 .

On January 3, 1911, under the arrangement referred to above, the

[2] The question raised here is whether the plaintiff bank, under the peculiar circumstances of this case has preserved its right to discharge its debt to the Trust Company by the application of the principle of equitable set-off, and whether it can recover from the superintendent of banks the amount of the check mailed by the plaintiff on January 5, 1911, and received by the superintendent of banks on January 7, 1911. The Special Term decided that the plaintiff was entitled to set-off against the sum due the Trust Company the amount of the indebtedness of the Trust Company to the plaintiff and rendered a judgment impressing a trust upon the proceeds of the plaintiff’s check in the hands of the superintendent of banks and directed the said superintendent to pay that amount to the plaintiff.

The appellants contend that, if the plaintiff bank ever had a right of offset, it never exercised the right, and in fact lost it by forwarding its check on January 5, 1911, to the Trust Company in payment of its indebtedness, and by the certification of the check. There is no doubt that had the plaintiff not mailed the check in question, its right of equitable set-off would be clear, and this being an instance of mutual debts, the plaintiff would have the right to discharge its debt to the Trust Company by offsetting to that extent the Trust Company’s debt to the plaintiff. As was said in the case of Hughitt v. Hayes, 136 N. Y. 163 , 32 N. E. 706 :

“ * * * Only the balance, In case of mutual debts, is the real sum owing by or to the insolvent.” Curtis v. Davidson, 215 N. Y. 395 , 109 N. E. 481 .

[3] Did the mailing of the check by plaintiff, its receipt by the superintendent of banks, and its subsequent certification and payment, destroy the right of set-off existing before the check was mailed? We think not, and for the following reasons:

When the plaintiff bank forwarded the check on January 5, 1911, it was in payment of a debt due from it to the Trust Company. At that time it had no knowledge of the insolvency of the Trust Company, and the superintendent of banks had not yet taken possession of its business, nor was its insolvent condition generally known.

[4] Of course, if plaintiff’s check had been received by the Trust Company itself and had gone into the Trust Company’s assets, there would be no question of offset raised. The check would have discharged the indebtedness. But here it was received by the superintendent, representing not alone the Trust Company, but the plaintiff as well, and he is bound to respect and protect the rights of the plaintiff as they existed at the moment he took charge of the Trust Company. Those rights became fixed by his act of taking possession, and nothing took place thereafter to change the relation of the parties to each other. At this time there were existing mutual debts between the parties. People ex rel. Attorney General v. Security Life Ins. & Annuity Co., 79 N. Y. 267 , 271; People ex rel. Attorney General v. Security Life Ins. Co., 71 N. Y. 222 ; Scott v. Armstrong, 146 U. S. 499 , 13 Sup. Ct. 148 , 36 L. Ed. 1059 ; People v. A. L. & T. Co., 70 App. Div. 579 , 75 N. Y. Supp. 563 ; Van Dyke v. McQuade, 85 N. Y. 616 .

The plaintiff had mailed the check in ignorance of the insolvency of the Trust Company and before the superintendent took charge. Presumably it would not have been mailed, had plaintiff known of the insolvency; and we can assume that under the circumstances it would not have sent the check to the superintendent, but would have rested upon its right of offset in a future adjustment of its indebtedness to the Trust Company. The superintendent holds the proceeds of this check solely because of the plaintiff’s ignorance of the Trust Company’s condition, and we think that it would be unfair and inequitable to allow the superintendent to treat this check as a payment of plaintiff’s debt to the Trust Company, and thus require the plaintiff to pay its debt in full while permitting the Trust Company to pay only in part.

Our conclusion is that the plaintiff has not lost its right of set-off, and that, as the superintendent collected the amount of the check and now holds the proceeds, those proceeds are impressed with a trust in favor of the plaintiff and should be paid to the plaintiff. Nor does this disposition of the case result in giving the plaintiff an unlawful preference over other creditors of the Trust Company, since it gives it no greater claim against the assets of the company than it had before it mailed the check. The money adjudged to be returned is really the property of the plaintiff.

The decision in the case of Carnegie Trust Company v. First National Bank, 213 N. Y. 301 , 107 N.

“The plaintiff, after receiving the defendants’ certification, had the legal title to a chose in action, and even though some equity remained in the bank in Cincinnati, the legal title was not divested.”

That case decided nothing more than that a right of set-off existing in the Cincinnati bank could not avail as a defense to the First National Bank in an action upon its certification. As was said by Mr. Justice Laughlin in the same case in his dissenting opinion ( 156 App. Div. 712 , 716, 141 N. Y. Supp. 745 , 748):

“The German National Bank of Cincinnati is not a party to this action, and .therefore no question with respect to its set-off rights, or in other words its right to have the Carnegie Trust Company’s liability to it applied in payment of the check, is presented for decision.”

And the Court of Appeals, referring to the Cincinnati bank, said in the course of its opinion:

“We think that whatever right it has must be determined on the distribution of the plaintiff’s assets, and is not available to this defendant as a defense to the acceptance. We find no authority for the proposition that a bank may resist the enforcement of its contract of certification in order to make a set-off available to its depositor.”

Indeed, the court refused to decide the question of the reciprocal rights of the Trust Company and the Cincinnati bank in the following language, found at page 306 of 213 N. Y., at page 694 of 107 N. E.:

“Whether any form of remedy is available to the bank in Cincinnati to repair the consequences of its mistake is, however, a question that we need not now determine.”

The judgment appealed from is affirmed, with costs.

CLARKE, P. J., and McLAUGHLIN and SMITH, JJ„ concur. DOWLING, J., dissents, on the authority of Carnegie Trust Co. v. Eirst National Bank, 213 N. Y. 301 , 107 N.