Armstrong v. Chemical Nat. Bank of City of New York

• Decision Date: 07 December 1897
• Docket Number: 473.
• Parties: ARMSTRONG v. CHEMICAL NAT. BANK OF CITY OF NEW YORK.
• Court: U.S. Court of Appeals — Sixth Circuit

83 F. 556

ARMSTRONG v. CHEMICAL NAT. BANK OF CITY OF NEW YORK.

No. 473.

United States Court of Appeals, Sixth Circuit.

December 7, 1897

The bill in the circuit court was exhibited by the Chemical National Bank of New York City against David Armstrong receiver of the Fidelity National Bank, to compel the allowance of a claim of $300,000, with interest, for a loan alleged to have been made by the Chemical Bank to the Fidelity Bank on March 2, 1887. In his amended answer the receiver denied that the Fidelity Bank had incurred the obligation, as alleged, or had received the proceeds thereof but averred that its vice president, E. L. Harper, and its cashier, Ammi Baldwin, in pretending to bind the Fidelity Bank thereto, had acted fraudulently and without authority of its directors, and in furtherance of a fraudulent scheme, by which the proceeds of the alleged loan were all appropriated to the use of Harper, and that all this was without the knowledge of the bank or its directors. It was conceded that a large amount of collateral had been deposited to secure payment of the loan. At the original hearings in the circuit court, and in this court, the question of Harper's and Baldwin's authority to bind the Fidelity Bank was but little discussed, although made both upon the pleadings and in the assignments of error. It was disposed of in a single sentence against the contention of the receiver in the first opinion in this court. The main question there considered was whether the Chemical Bank was obliged to reduce its claim by the proceeds of collateral held to secure the debt, and collected after the declared insolvency and before the filing of proof. This court, reversing the circuit court, held that no such deduction need be made, but that the claim must be allowed in full for the principal and interest due and unpaid at the date of the declared insolvency. 16 U.S.App. 465 8 C.C.A. 155, and 59 F. 372. A motion for rehearing was made by the Chemical National Bank on a subordinate question as to the interest to be allowed on delayed dividends. Pending the motion, the supreme court of the United States announced its opinion in the case of Western Nat. Bank v. Armstrong, 152 U.S. 346, 14 Sup.Ct. 572, in which it was held that 'the borrowing of money by a national bank, though not illegal, was so much out of the course of ordinary and legitimate banking business as to require those making the loan to see to it that the officer or agent acting for the bank had special authority to borrow money,' and that where no special authority appeared, and no ratification of the unauthorized act was shown, the bank was not liable. Thereupon; while the case on rehearing was still before this court, Armstrong also made a motion for rehearing on the issue whether the Fidelity Bank was liable for the alleged loan. A rehearing was granted and had, and the following order was made: 'That the decree of the circuit court is reversed, with leave to the parties to adduce further evidence upon the issue whether the Fidelity Bank owes anything to the Chemical Bank by virtue of the alleged loan; that, if the issue is decided in favor of the receiver, the bill shall be dismissed, and a decree entered in favor of the receiver for the restitution of the $100,000 paid by the receiver on July 25, 1892, to the Chemical Bank on the faith of the decree of the court below that, if the liability of the Fidelity Bank for the loan is established, a decree shall be entered directing the receiver to allow the claim for $305,450 (being the amount of the loan and interest to the date of the declared insolvency, June 21, 1887), ' and to pay the dividends accrued and accruing thereon, with interest on delayed dividends, taking credit for the $100,000 already paid, on the principle ordinarily applied in partial payments. 31 U.S.App. 75, 13 C.C.A. 47, and 65 F. 573. New evidence was accordingly adduced in the circuit court by both parties, and, upon the whole record, the circuit court held the Fidelity Bank liable for the loan, and thereupon entered a decree against the receiver in accord with the mandate of this court, for the allowance of the claim for $305,450, and for the payment, by way of dividends and interest, after crediting the $100,000 paid July 25, 1892 (referred to above), of $117,749.58, with interest from October 21, 1896. The opinion of Judge Sage, who presided in the circuit court, is reported in 76 F. 339.

The facts disclosed by the record are as follows:

On February 28, 1887, Harper, vice president of the Fidelity Bank, mailed at Cincinnati, to the cashier of the Chemical Bank, in New York, a letter, of which the following is a copy:

'Briggs Swift, President. E. L. Harper, Vice President. Ammi Baldwin, Cashier. Benjamin E. Hopkins, Asst. Cashier.

'United States Depository. The Fidelity National Bank.

'Cincinnati, February 28, 1887.

'Wm. J. Quinlan, Jr., Cashier Chemical National Bank, New York City-- Dear Sir: Inclosed herewith we hand you for credit our certificate of deposit No. 345, for $300,000, with bills as collateral, as follows: (Then was set out a list of twenty-seven notes, aggregating $326,000.) We desire to keep a large reserve with you, and we trust you will make the rate as low as you proposed some time since. Please place the amount to our credit, and advise the rate.

'Respectfully, yours,

E. L. Harper, Vice President.'

The certificate of deposit inclosed was as follows:

'The Fidelity National Bank.

'E. L. Harper has deposited in this bank three hundred thousand ($300,000), payable to the order of himself on return of this certificate, in current funds.

'$300,000.

Ammi Baldwin, Cashier.'

Indorsed: 'E. L. Harper.'

This letter of February 28th was not copied into the letterpress copy books of the Fidelity Bank, and the stub of certificate of deposit was marked 'Canceled.' Of the collateral bills receivable sent, 19 pieces, aggregating $146,169.29, par value, were the property of the Fidelity Bank, and the remainder, aggregating $180,000, were mere accommodation paper procured by Harper, and not appearing on the books of the Fidelity Bank. The letter reached New York on March 2d, and upon that day Quinlan, cashier of the Chemical Bank, wrote and mailed the following letter: 'New York, March 2, 1887.

'A. Baldwin, Esquire, Cashier-- Dear Sir: Your favor of the 28th inst. has been received. We credit Fidelity National Bank $300,000, and shall be considerate as to rate of interest when the loan is paid. * * *

'Wm. J. Quinlan, Jr., Cashier.'

Upon the books of the Chemical Bank was entered, on March 2d, this credit in favor of the Fidelity Bank: 'Fidelity Temp. Loans, $300,000.'

Upon the 2d of March, two days before Harper could have received the answer, he directed Watters, the general bookkeeper of the bank, to credit his (Harper's) individual account with $300,000, and to charge the Chemical Bank with the same on account of 'transfer of funds.' These two entries, taken together, meant that Harper had deposited $300,000 in the Chemical Bank to the credit of the Fidelity Bank, and that the same had been carried to his individual credit on the books of the latter bank.

On May 19th the following telegram was sent to the Chemical Bank:

'Cincinnati, May 19, 1887.

'To Chemical National Bank, New York: We send other bills to take place. Will want all returned here without presenting, as we advised parties to arrange payment here.

Fidelity National Bank.'

On May 20th Harper wrote and mailed the following letter:

'May 20, 1887.

'William J. Quinlan, Jr., Cashier, New York-- Dear Sir: Please do not present any of the collateral paper for payment. We have advised parties we would order back and charge up here. We will to-morrow send you new notes to take place of ones maturing. We will pay the loan July 15th, and will pay interest till that date, if agreeable to you.

'Yours, truly,

E. L. Harper, V.P.'

On May 21st Harper wrote and mailed the following letter:

'Cincinnati, May 21, 1887.

'Chemical National Bank, New York City-- Gentlemen: Inclosed herewith we hand you to hold as collateral the following bills. (Then follows a list of twenty-one notes, aggregating $230,592.46.) Will you kindly return to me the following: (Then follows a list of nineteen notes of those forwarded in his letter of February 28th.) We will pay the loan July 15, 1887, if agreeable to you, and will pay interest now to that date.

'Respectfully yours,

E. L. Harper, Vice President.

The substitution of collateral was effected in accordance with Harper's request. Nothing was paid on the loan, and nothing collected by the Chemical Bank on the collateral, until after the suspension of the Fidelity Bank. There is affirmative evidence that three or four of the nine directors had no actual knowledge of this loan. And there is no evidence that any of the other directors had knowledge of it except Harper and Baldwin, and probably Hopkins, the assistant cashier, who were all directors.

The Chemical Bank based its contention that the Fidelity Bank was liable for this loan on several grounds: First, that it was the custom in New York and Cincinnati for banks to borrow money one from another, and that the executive officers of the bank-- the president, the vice president and the cashier or either of them-- were, by custom, regarded as having authority to contract such loans: second, that the directors of the Fidelity Bank had entirely abandoned to Harper the direction and management of the affairs of the bank, and thereby conferred upon him all necessary authority to do what they might do; third, that the Fidelity Bank had full notice of the loan nearly three months before the suspension, and, by failure to repudiate it, ratified...