Merchants' Bank of Valdosta v. Baird

• Citation: 160 F. 642
• Decision Date: 02 March 1908
• Docket Number: 2,512.
• Parties: MERCHANTS' BANK OF VALDOSTA v. BAIRD.
• Court: United States Courts of Appeals. United States Court of Appeals (8th Circuit)

160 F. 642

MERCHANTS' BANK OF VALDOSTA v. BAIRD.

No. 2,512.

United States Court of Appeals, Eighth Circuit.

March 2, 1908

The Merchants' Bank of Valdosta sued the receiver of the First National Bank of Faribault to recover upon eight checks drawn by the Minnesota Lumber Company upon the latter bank and cashed by the former upon the authority of a letter and two telegrams. The case was tried by the court upon the pleadings and an agreed statement of facts. The defendant had judgment, and the plaintiff prosecuted this writ of error. The facts are substantially as follows: At the time of the transactions in question the plaintiff was a bank organized under the laws of Georgia, and doing business at Valdosta, in that state. The lumber company was a corporation engaged in manufacturing lumber in Georgia. The First National Bank of Faribault, as its name indicates, was a banking association organized under the laws of the United States. It was engaged in business at Faribault, Minn., and its capital was $50,000. For some years prior to September 6, 1904, the lumber company had an account with the National Bank, but in one form or another it was always indebted to the bank. On September 6 1904, it owed the bank $11,848.66 on its own notes and notes of others made for its benefit. Besides this, the bank had purchased and then held bonds of the lumber company unsecured by mortgage or other lien, amounting to $33,500. Prior to the date mentioned the plaintiff, the Georgia bank had been paying checks drawn by the lumber company upon the National Bank, obtaining in each case the authority of the latter to do so, but in order to obviate the trouble and expense incident to that course it wrote the National Bank on September 1, 1904, for general authority to pay such checks.

On September 6, 1904, T. B. Clement, as president of the National Bank, replied as follows:

'Faribault, Minn., 9-6-04.

'Merchants' Bank of Valdosta, Valdosta, Ga.

'Gentlemen: In reply to your letter of the 1st regarding checks drawn by the Minnesota Lumber Company on this bank, would say that there is no reason for Mr. Trump acting for the Minnesota Lumber Company, drawing any checks that this bank would not honor, but think there should be some limit placed, and we will say that checks of the Minnesota Lumber Co.'s drawn by J. H. Trump or H. O. Clement on this bank will be paid up to the amount of $5,000.00 in any one week. If any more than $5,000.00 should be drawn in any one week, have them wire for permission.'

On December 6, 1904, the National Bank wired the Georgia bank as follows:

'Faribault, Minn., 6 Dec. 1904.

'Merchants' Bank, Valdosta, Ga.

'We will protect checks of Minnesota Lumber Company for five thousand dollars per week in excess of present guarantee.'

And on December 22, 1904, it further wired the Georgia bank as follows:

'Faribault, Minn., Dec. 22, 1904.

'Merchants' Bank, Valdosta, Ga.

'You can pay checks Minnesota Lumber Company on us this week in excess of guaranty on personal request of H. O. Clement.'

T. B Clement as president signed the name of his bank to both telegrams. H. O. Clement, mentioned in the last telegram, made the personal request therein required. He was a son of T. B. Clement. In reliance upon these communications, and upon the previous course of dealing, the Georgia bank cashed the checks of the lumber company amounting to $125,000 between September 6, 1904, and January 1, 1905, all of which were honored and paid by the National Bank excepting the last eight for $1,000 each, and excepting that upon one of the eight a part payment was made. The National Bank became insolvent and was closed by the Comptroller of the Currency January 2, 1905. The lumber company was also insolvent. At the close of the bank the lumber company owed the National Bank $33,500 on unsecured bonds and $43,560.32 on other account. The directors of the defunct bank had left the management thereof wholly to T. B. Clement, the president, and they were not aware of the transactions carried on between the two banks and the lumber company. The National Bank was not interested in the business of the lumber company excepting as a creditor. The Georgia bank knew that the proceeds of the checks were for use in the business of the lumber company. Between September 6, 1904, and the 1st of the following January, the account of the lumber company upon the books of the National Bank generally showed a credit balance, but this condition was largely due to the 'kiting' of checks and drafts. When the National Bank was closed, there were outstanding and unpaid drafts and checks amounting to over $35,000, for which the lumber company had received credit in its account, and by charging them back a large overdraft would result. It was stipulated that the Georgia bank was not aware of the condition of the lumber company's account with the National Bank, and that it believed that the latter was a bank in good standing, well managed, and that its president was a person of integrity, of good business management, and deserving of trust and credit, but it also appeared that the keeping of checks and drafts afloat, corresponding in amount with checks cashed by the Georgia bank, was known to it, for in part they were sent to that bank with remittances for checks paid by it. In other words, when the National Bank sent the Georgia bank money or drafts in payment of checks cashed by the latter, it would also send for collection a corresponding draft or check of the lumber company. Checks drawn by the lumber company on the Georgia bank were employed in the kiting process; also drafts drawn by the lumber company upon itself. The time required for transmission of the collection items from Georgia to...