Opinion
No. 3167.
December 18, 1936.
Appeal from the District Court of the United States for the District of Massachusetts; Elisha H. Brewster, Judge.
Suit by the Converse Rubber Company against the Boston-Continental National Bank and its receiver, and another. From an adverse decree ( 12 F. Supp. 887), the plaintiff appeals.
Affirmed.
This is an appeal from a decree of June 8, 1936, of the federal District Court for Massachusetts dismissing the plaintiff's bill of complaint as to all defendants; without prejudice, however, to the right of the plaintiff to file a proof of claim as a general creditor of the Boston-Continental National Bank with its receiver.
The bill was originally brought in the state court against the Boston-Continental National Bank and its receiver, who removed it to the District Court. After it had been in the federal court about three years, the plaintiff was permitted to file an amended bill joining the Federal Reserve Bank as a party defendant. After the decree of June 8 the plaintiff waived its right of appeal as to the Federal Reserve Bank, so that now the questions before this court relate to errors alleged to have taken place in the proceedings and decree, in so far as they affect the Continental Bank and its receiver. By the amended bill the plaintiff seeks to establish a prior claim or trust upon the assets of the Continental Bank in the hands of its receiver.
On December 12, 1931, the plaintiff had on deposit in the Continental Bank $67,999.12. On that day the plaintiff drew a check on the Continental Bank for $50,000, payable to the order of the First National Bank, and, on December 15, 1931, deposited the same in the First National Bank where it was credited to the plaintiff's account. December 16, 1931, at 8:57 a.m. this check, together with others drawn on the Continental Bank, aggregating $169,541.14, was delivered by the First National Bank to the Federal Reserve Bank of Boston for collection. Upon receipt of these checks the Reserve Bank credited the account of the First National with the sum of $169,542.14 and debited the reserve account of the Continental Bank with the same amount. Before 9:15 a.m. (December 16) these checks, including the plaintiff's check, were delivered to a representative of the Continental Bank. The records of the Continental Bank show that on December 16 the plaintiff had in fact a balance on deposit there of $74,499.12; that on that day its account was charged and credited with $50,000 without a change being recorded in the balance as a result of the transaction. The two entries were made at the same time, and the bookkeeper testified that they were made merely to have a record that the check had been received by the bank.
Some time between 12 noon and 1 p.m. of December 16 the Continental Bank returned the plaintiff's check to the Reserve Bank, together with a slip attached, indicating that the check had been recalled, and a credit memorandum.
The District Court found that the check had not been recalled by the plaintiff; that no one in authority had authorized its recall; and that the act of the bank in returning the check with a slip indicating that it had been recalled was wholly without sanction; that the representation that the check had been recalled was false; that the plaintiff did not act upon it; that it was doubtful whether it could be said to be fraudulent; and that the refusal of the Continental Bank to pay the check amounted to no more than a breach of its contract with the plaintiff.
Upon the return of the plaintiff's check to the Reserve Bank, that bank sent the check and the return slip to the First National Bank, credited it to the account of the Continental Bank, and debited the account of the First National with the amount of the check; and, in connection with this transaction, received from the First National Bank its duebill, which, in due course, was sent to the Boston Clearing House and collected the following day, December 17.
After the First National Bank received the check for $50,000 and the memorandum indicating its recall, it sent them to the plaintiff advising it that its account in the First National had been debited with a check which had been returned unpaid.
Under an agreement between the First National and the Reserve Bank with respect to the collection and payment of checks (Defendants' Exhibits 5, 5A, and 5B), the First National was entitled to the immediate credit of checks drawn on the Continental Bank which were acceptable for collection by the Reserve Bank as cash items (Defendants' Exhibit 5B, § 8), "Provided, however, that we [the Federal Reserve Bank] may in our discretion refuse at any time to permit the withdrawal or other use of credit given for any item for which we have not yet received payment in actually and finally collected funds"; the agreement also provided that the Reserve Bank "will act only as agent of the bank from which it receives such checks" (Defendants' Exhibit 5B, § 2(1); that "credit will in all instances be subject to receipt of payment by us in actually and finally collected funds" (Defendants' Exhibit 5B, § 8); and that "the amount of any check for which payment in actually and finally collected funds is not received shall be charged back to the forwarding bank, regardless of whether or not the check can be returned. In such event, neither the owner or holder of any such check, nor the bank which sent such check to the Federal Reserve Bank for collection shall have any right of recourse upon, interest in, or right of payment from, any reserve balance, clearing account, deposit account, or other such fund of the drawee bank or of any bank to which such checks have been sent for collection, in the possession of the Federal Reserve Bank" (Defendants' Exhibit 5B, § 2(7).
These provisions cover the relationship between the Federal Reserve Bank and the First National.
A special agreement existed between the Federal Reserve Bank and the Continental Bank covering collection of checks drawn on the Continental. It authorized the Reserve Bank to charge the Continental Bank with the gross amount of items deposited with the Reserve Bank for collection and payable by the Continental. In it the Continental also agreed to return dishonored items to the Reserve Bank not later than 1:30 p.m. on weekdays (December 16, 1931, was Wednesday), and that in such event the Federal Reserve agreed to credit the Continental reserve account with the amount of said items. It was also further provided that all items payable by the Continental and deposited with the Federal Reserve for collection, upon being delivered to the Continental's representative, should be "considered as having been presented for payment over our [the Continental's] counter at the time of such delivery or presentation."
At the opening of business on December 16, 1931, the Reserve Bank had on hand a credit in the reserve account of the Continental Bank of approximately $249,000. It also had on hand items for collection amounting to $245,000. At 2:50 p.m. on December 16, 1931, the reserve account became overdrawn to the extent of approximately $22,000, and this was after the Reserve Bank had credited the reserve account of the Continental Bank with the sum of $50,000 as a result of the return of the plaintiff's check. At the close of business on December 16, 1931, the overdraft in the reserve account of the Continental Bank amounted to $22,643.33, and the items in process of collection by the Reserve Bank for the Continental Bank amounted to $178,981.85.
At that time the Reserve Bank was carrying loans for the Continental Bank in the sum of approximately $1,010,000, secured by collateral having a face value of approximately $1,055,000. Under the terms of the note or notes representing the loans, the Reserve Bank had the right to apply towards any existing indebtedness any reserve fund in its bank to the credit of the Continental Bank and the proceeds of any uncollected items. On April 22, 1932, there was then a balance in the reserve fund or account of the Continental which was applied in reduction of its indebtedness to the Reserve Bank. On August 9, 1933, the Reserve Bank, having satisfied in full the indebtedness of the Continental Bank, turned over to the receiver of the Continental Bank the sum of $5,721.71 in cash and collateral having a face value at that time of $453,948.76.
The Continental Bank did business, paid and honored checks, and in all other matters conducted itself as a going national bank until the close of business on December 17, 1931. The Comptroller of the Currency took possession of the Continental Bank on December 17, 1931, and on December 22 a receiver was appointed.
Israel Gorovitz, of Boston, Mass. (Harry E. Burroughs, of Boston, Mass., on the brief), for appellant.
Murray F. Hall, of Boston, Mass. (Donald J. Hurley and Goodwin, Procter Hoar, all of Boston, Mass., on the brief), for appellees.
Before BINGHAM, WILSON, and MORTON, Circuit Judges.
In disposing the claim of the plaintiff against the Federal Reserve Bank, the District Court pointed out that that bank received the plaintiff's check from the First National Bank for collection; that it acted only as agent for the forwarding bank; that any checks not actually and finally paid were to be charged back to the forwarding bank; that the check in question was not paid in actually and finally collected funds; and that, under the terms of the agreement between the Continental Bank and the Reserve Bank, the Continental Bank had an unconditional right to return any check drawn upon it and receive a credit on its reserve account in the Reserve Bank. It further found that the crediting of the check to the First National Bank and the debiting of it to the reserve account of the Continental was provisional only and the Reserve Bank as the holder of the check acquired no rights against the Continental Bank; and that, since the Reserve Bank had acquired no right to have the check paid and it was not in fact collected, the Reserve Bank could not be held accountable to the plaintiff for the amount of it.
There can be no doubt that the credit given to the First National Bank as well as the debit charged to the Continental Bank upon receipt of the check was a provisional or conditional credit and debit under the terms of the agreements between the banks, and that the credit would become absolute only upon the check being paid in actually and finally collected funds, which never occurred. The credit given to the First National being provisional only and subject to the right of the Reserve Bank to cancel it at any time before collection of the check, which was the situation here, the plaintiff acquired no property right in such credit and, by its authorized cancellation, it suffered no loss. As the plaintiff had no property right in the provisional credit and its cancellation was authorized, then certainly there was no property or property right that was lost by the cancellation of the credit to which a constructive trust ex maleficio could attach. The Reserve Bank in cancelling the credit or charging back the check to the First National account committed no wrong, fraudulent or otherwise, and, unless the plaintiff had a property right in the conditional credit which it lost through a wrongful act of the Reserve Bank, no constructive trust arose in favor of the plaintiff in the conditional credit to the First National which was canceled and credited to the reserve account of the Continental.
The Reserve Bank, on return of the check to it, canceled the credit to the First National and gave credit for its amount ($50,000) to the reserve account of the Continental, because the check was returned to it dishonored and had not been paid in "actually and finally" collected funds, and not because the memorandum that accompanied the check on its return to the Reserve Bank from the Continental Bank stated that the check had been recalled.
The plaintiff seems to think, and argues in its brief, that the great preponderance of the evidence in the case shows that the check had been paid; that the Continental "had specifically agreed with the Reserve Bank that the entry of a debit to its reserve account should constitute payment at the time of delivery of the item [check] to the representative of the appellee bank." In support of this it calls attention to the letter of the Continental Bank to the Reserve Bank of December 27, 1930 (Defendants' Exhibit 5), wherein the Continental Bank agreed to call at the office of the Reserve Bank at a particular hour for all items payable by it and deposited with the Reserve Bank for collection, and the further provision wherein it agreed to consider items so delivered to the Continental's representative as having been presented for payment over its counter at the time of such delivery; and also to the clause in the letter wherein the Continental authorized the Reserve Bank to charge its account with the gross amount of such items. But it leaves out and fails to call attention to the further provision in the letter wherein it was stipulated that the Continental Bank should have the right to return to the Reserve Bank "all dishonored items not later than 1:30 on all week days," and thereupon the Reserve Bank should credit the Continental's reserve account with the amount of all such dishonored items. All of which goes to show that not only the credit given the First National on the receipt of the check by the Reserve Bank was tentative, but that the charge made of the check to the reserve account of the Continental was likewise tentative, and, the check having been returned by the Continental to the Reserve Bank dishonored, the Reserve Bank was bound by its agreement to credit the amount of it back to the reserve account of the Continental; and, the Reserve Bank having reserved the right, as against the First National, to charge back to its account "the amount of any check for which payment in actually and finally collected funds is not received," it is idle to argue that the check was paid by the tentative credit and charge to the respective banks, or that the plaintiff had a property right in the credit.
But, if it could be said that the plaintiff had a property right in the credit and that was a res to which a trust could attach, and that, due to a false representation by the Continental Bank, the plaintiff lost its credit to the Continental Bank by its being credited to the reserve account of the latter in the Reserve Bank, the facts in this case show that the fund represented by the credit thus given the Continental Bank never reached the hands of the Comptroller or receiver, for the reserve account to which it was credited was later on that day exhausted and remained exhausted to the close of business on December 16, 1931, after which the Continental Bank never opened. The reserve account to which the check for $50,000 was credited having been exhausted, the fund in that account, which included the check, could not be traced into the hands of the comptroller on the following day or thereafter into the hands of the receiver.
It appears that other checks in favor of the Continental Bank were in the hands of the Reserve Bank for collection and were in process of collection by that bank on December 16, 1931. But the funds later realized from those checks were not a part of the reserve account on December 16, 1931, and no trust could attach to them; and, the reserve account, to which the check was credited, having been exhausted at the close of business on December 16, no funds from that account, as it then existed, could have been later used to redeem the securities pledged by the Continental Bank to the Reserve Bank to secure the former's loan of $1,010,000, and no trust could attach to these securities as having been obtained by the receiver through the use of the fund representing the check.
We therefore conclude that the District Court did not err in holding that no trust for the benefit of the plaintiff was imposed on the assets of the Continental Bank that came into the hands of the receiver and that the plaintiff stands as a general creditor.
The decree of the District Court is affirmed, with costs to the appellees.