Rector v. City Deposit Bank Co.

delivered the opinion of the court.

The firm of Reinhard & Company, composed of John G. Reinhard and Henry A. Reinhard, carried on a banking business in Columbus, Ohio. On April 10, 1900, the firm made a general assignment under the insolvent laws of Ohio. On the following day a petition in involuntary bankruptcy under the laws of the United States was filed against the firm, and on August 10, 1900, it was adjudged bankrupt, and subsequently Rector, the plaintiff in error, was appointed the trustee.

In a Court of Common Pleas of the State" of Ohio the trustee began this suit against the defendant in error to recover the sum of $1,300, which it was subsequently agreed w^as only $1,161.74. The petition alleged the adjudication in bankruptcy and the appointment of the trustee, and based his right to recover upon the ground that on April 10, 1900, the firm had transferred and assigned to the defendant bank, who had received the same the sum of money sued for, which it was

Both these contentions might well be disposed of by saying that the action was brought by a trustee appointed under the bankrupt law of the United States, seeking to recover what was asserted to be an asset of the bankrupt estate undei\that law. This, therefore, presented a Federal question, and the denial of the asserted right was a denial of a right or title specially claimed under a law of the United States. Peck v. Jenness, 7 How. 612 ; Barton v. Geiler, 108 U. S. 161 ; Williams v. Heard 140 U. S. 529 ; Dushane v. Beall, 161 U. S. 513 ; Stanley v. Schwalby, 162 U. S. 255 . Whether expressions, relied upon in argument, contained in Cramer v. Wilson, 195 U. S. 408 , 416, must be taken as not in harmony with the previous cases, or whether those expressions simply implied that where a right claimed by a trustee in bankruptcy in its final aspect depended

Coming to the merits, we premise that if the court below had found the facts we should be bound thereby. .Here, however, as we have seen, the court below did not find the facts, but instructed .a verdict for the defendant, being of the opinion that upon no view of the evidence was there a case made which would have justified a verdict for,the plaintiff- This raises a question of law, which ig"this: Was the evidence such as would have justified the jury, under any reasonable view, thereof, to

Outside the .testimony of the trustee, as to the insolvency of the bankrupt estate, the only evidence introduced was the testimony of John Field, 'manager of the Columbus Clearing House Associatipn. By that testimony the following facts were disclosed:

Prior to the bankruptcy of Reinhard & Company that firm carried on a banking business in the city of Columbus, Ohio, and the firm, as well as the City Deposit Bank Company, were members of the clearing house association. In order to accomplish the purpose of its existence the clearing house association was an agent, for a limited purpose, of the banks composing the association, that is, its duty was to clear or balance daily the claims of the respective, banks, one against thfe other, resulting from the checks drawn upon and held by the different members. The only source from which the association. derived the means to carry on its operations was from assessments upon the members, which were made solely for the purpose of paying rent, salaries, and similar expenditures. To effect the clearings each member of the association, on banking days, sent to the clearing house, at a specified hour, the checks held by it against other banks. The checks sent by each member were considered as remaining the property of the member,, the association being simply an agent for collection. Where the sum of the checks presented by one bank exceeded the sum of the checks against it presented by other members of the association, that bank had, of course, a credit balance. Where the checks presented by a particular bank against other banks were less than the sum of the checks against it presented by other banks, that bank had a debit balance. Where a bank .was entitled to a credit or payment corresponding to the excess. which the sum of the checks presented by it exceeded the sum

In making the clearings on April 9, 1900, the day before the assignment of Reinhard & Company, the checks presented against that firm in the clearings exceeded the checks presented by it against other banks by $1,161.74, that is, Reinhard & Company, as a result of the clearing, was indebted in that amount. On the same day the City Deposit Bank presented in the clearings checks drawn upon other banks which exceeded by $10,245.63 the amount of the checks presented against that bank; in other words, as a result of the clearings it was entitled to receive the amount of money just stated. In payment of the balance' the clearing house gave to the City Deposit Bank a check on Reinhard & Company for the sum due by that firm, viz., $1,161.74, and a check upon the Capital City Bank for $9,083.89. There was nothing in the evidence to show upon what bank the checks were drawn which were held by the City Deposit Bank on April 9, and which it presented for clearing on that day, nor was there anything in the evidence to show upon what banks the checks' were drawn which were presented by Reinhard & Company for clearing on the same day. The check of the clearing house on Reinhard & Company for. the balance due by that firm in the clearings, and which, as we have said, was given to the City Deposit Bank, was not on that day presented by the City Deposit Bank to Reinhard & Company for payment. On the contrary, the City Deposit Bank held the clearing house check until the next day. When on the morning of the tenth of April the City Deposit Bank presented its chocks for clearing, it treated the clearing house check on Reinhard & Company as being entitled to participate in the clearing and included it in the cheeks presented for (hat purpose.

On the morning of April 10 the checks, as presented to the

“In case of failure to respond promptly to the checks of the manager, on the part of any member of the association, they shall be immediately returned to the manager, who shall call upon the other banks or bankers to make up the sum for which payment has been refused in proportion to the amount. of checks upon the defaulting member sent into the clearing house at the preceding settlement, which sums so furnished or contributed shall constitute claims in the hands of the responding members respectively against the defaulting members, and it is hereby agreed that the checks received from the clearing house by the defaulting members shall be delivered, if required, to the member owning the same without mutilation; the agency of the clearing house in the matter, it is understood, is only as a trustee, and in no case is the association to be held responsible for any loss that may occur.”

All the checks drawn against Reinhard & Company and which figured in the morning settlement were returned to the clearing house with the information that Reinhard & Company had failed. The clearing-house thereupon revised the previous , settlements by deducting, wherever appearing, the credits which had been given for checks drawn on Reinhard & Com

"I told him that the Reinhards had failed, and that his check had been returned, and that I had a balance due Reinhard & Company, and that I woujxl substitute a check on the Capital City Bank for this check on Reinhard; which had been returned. • Mr. Jennings said that he would — I think he said he would telephone Mr. Outhwaite, and if it was all right he would return my check, the Reinhard check. . .

Subsequently, referring to checks which the witness had carried to the City Deposit Bank to give to that bank in exchange for tire prior check of $4,875.98, ho said:

“It runs in my mind . . . that I told him that I wanted to substitute those, and that he asked me wliat for, and I told him not to ask any questions — I am not sure about that— that I wanted to substitute those checks.”

Certain it is, however, that the manager took up the checks for $4,875.98 drawn on the Deslder Bank, which had been given to the City Deposit Bank in discharge of the credit balance in its favor as the result of the previous clearing of that day, and substituted for it a check for $3,714.24, drawn on the Deshler

Analyzing these facts for the purpose of arriving at the inferences which may reasonably be deduced fronr them, this plainly results: When on the morning of April 10, 1900, as the result of the failure of Reinhard & Company, the clearings of that day required revision, the clearing house having received back the checks drawn on Reinhard & Company which it had.cleared for its members that morning, made new settlements with those members based upon deductions from the original settlements of the sum of the checks which had been put in the clearings on that morning and were afterwards dishonored. The result of each new settlement was that the amount due to the member" was reduced or the indebtedness §hown on the original settlement was increased, according as by the original settlement the member was a creditor of or a debtor in the clearing; and, as a nécessary consequence of the new settlements having eliminated all the debits against Rein-hard & Company, the clearing house held, as the property of that firm, the proceeds of the checks on other banks which that firm had sent for clearing on that morning.

The statements of the manager as to what was done with the clearing house check which had been put in the clearings by the City Deposit Bank are not perfectly clear. In one aspect he returned that check to the City Deposit Bank as he had returned the other dishonored checks, and then gave to the City Deposit Bank a check for the amount due it on the revision of the clearing ($3,714.24), and also delivered a check for $1,161.74, to take up the dishonored clearing house check. In another aspect the same result was brought about without any return of the dishonored check. The mere form of the transaction, however, does not affect its nature. The payment out of this fund by the manager, in part to the City Deposit Bank and in part to another bank, therefore amounted simply to

The result, however, of the proof would not be different, even if it be conceded that under the rule, as to clearings, which we have quoted, the clearing house would have had the power, upon the default of one of its members, simply to call upon the other members .to pay in a pro rata proportion of the amount of the check or checks which had been drawn upon the defaulting member, and to treat the credit standing in the clearing in favor of the defaulting member as belonging proportionately to the contributing members. We say this because even under such hypothesis the clearing house check held by the City Deposit Bank would not have been entitled to so participate. That check was the result of the clearings of the previous day, and, under the hypothesis as to the meaning of the rule in which we have indulged, the holder was, only entitled to obtain payment; pro rata, from those who had presented checks

Was the receipt and appropriation of the $1,101.74 by the City Deposit Bank a preference within the bankruptcy law is, then, the question. It is said that it was not, because to constitute a preference under that law the transfer-or payment must have been the act of the bankrupt. Western Tie & Timber Co. v. Brown, 196 U. S. 502 . Here it is insisted that it cannot be so held, because there was nothing in the proof warranting the implication that the firm authorized or ratified the misappropriation or. that the clearing house was the agent of the firm when it made such misappropriation. The latter proposition rests on the contention that whatever agency the association possessed in virtue of its authority to make clearings was revoked by the fact of the voluntary assignment made by Reinhart! & Company before the money was appropriated to the City Deposit Bank. Whilst it may be conceded that these propositions are well founded, it. does not follow that the inferences deducible from the evidence did not warrant the conclusion that under the bankrupt law of the United States there was a duty on the part of the City Deposit Bank to pay over to the trustee the sum received by it of the funds of Rein-hard & Company deposited on April 10, 1900, with the clearing house for the purposes of the clearing of that date. From the inferences which we have stated were properly deducible from the evidence, it follows that the jury would have been amply ■ justified in finding that the clearing house had made a wrongful disposition of a trust fund in favor of the City Deposit Bank, which institution had notice, either actual or constructive, of the misappropriation. Western Tie & Timber Co. v. Brown, supra.

We interpret the certificate of the Supreme Court of Ohio as establishing that that court did not rest its affirmance of the judgment rendered by the trial court against the trustees upon the mere technical ground that the petition counted upon, a voidable preference, and there could not be a recovery unless

The judgment of the Supreme Court of Ohio must he reversed and the cause he remanded to that court for further proceedings, not inconsistent with this opinion.