Baldwin's Bank of Penn Yan v. Smith

• Decision Date: 25 May 1915
• Citation: 109 N.E. 138,215 N.Y. 76
• Parties: BALDWIN'S BANK OF PENN YAN, v. SMITH et al.
• Court: New York Court of Appeals Court of Appeals

215 N.Y. 76

109 N.E. 138

BALDWIN'S BANK OF PENN YAN,

v.SMITH et al.

Court of Appeals of New York.

May 25, 1915.

Appeal from Supreme Court, Appellate Division, Fourth Department.

Action by Baldwin's Bank of Penn Yan against Albert L. Smith and Walter S. Smith. From a judgment of the Appellate Division (155 App.Div. 881, 139 N.Y.Supp. 1115) affirming a judgment for plaintiff, defendants appeal. Reversed, and complaint dismissed.

Lewis H. Watkins, of Watkins, for appellants.

Spencer F. Lincoln, of Penn Yan, for respondent.

MILLER.

This is an action on a promissory note made by the defendants on the 11th day of august, 1910, payable to the order of W.N. Wise four months after date at the Farmers' & Merchants' Bank, Watkins, N.Y. The plaintiff became the holder of the note in due course, and before maturity sent it to the bank where it was made payable “for collection and remittance.” On the 19th day of December, 1910, seven days after the maturity of the note, said bank suspended without having remitted for the note, although during all of that time defendants had more than sufficient funds to their credit with it to meet the note, and the bank had sufficient funds to pay it. On Monday, December 12th, the due date having fallen on Sunday, the 11th, one of the defendants called the president of the Watkins bank by phone and inquired if the note was there, and, being informed that it was, instructed the president to charge it to the defendants' account, and was told that that would be done. The plaintiff made no inquiry or effort to ascertain the fate of the note until after the failure of the Watkins bank.

[1] This is a case of first impression. The trial court relied on Indig v. National City Bank of Brooklyn, 80 N.Y. 100. But that case is plainly distinguishable. The defendant there received a note from the plaintiff for collection and sent it to the bank where it was payable, which received it the day it fell due, and the next day sent a New York draft for the amount of the note, less exchange, to the defendant, who received it the following day. On the day the draft was forwarded to the defendant the sender closed its doors, and the draft was not paid. The defendant was sought to be made liable for negligence in sending the note to the bank where it was made payable. But it was held that that did not constitute actionable negligence, for the reason that the same result might have ensued if the defendant had employed a subagent, who would have been justified in accepting the draft. Judge Rapallo did say that the defendant did not constitute the bank to which it sent the note its agent to receive the proceeds. But his opinion received the concurrence of only two of the judges, and on that point has, in effect, been overruled by this court (National Revere Bank of Boston v. National Bank of the Republic of N.Y., 172 N.Y. 102, 64 N.E. 799), and is opposed to the weight of authority (Smith v. President, etc., Essex County Bank, 22 Barb. 627;Ayrault v. Pacific Bank, 47 N.Y. 570, 7 Am.Rep. 489;Bank of Washington v. Triplett, 1 Pet. 25, 7 L.Ed. 37;Ward v. Smith, 7 Wall, 447, 19 L.Ed.207;Cheney v. Libby, 134 U.S. 68, 82, 10 Sup.Ct. 498, 33 L.Ed. 818). Plainly by sending the note “for collection and remittance” the plaintiff in this case constituted the Watkins bank its agent to collect the note and remit the proceeds.

[2] It is settled law that the failure to make demand at the time and place of payment agreed upon does not exonerate the debtor, whose readiness to pay at the specified time and place is merely equivalent to a tender. Hills v. Place, 48 N.Y. 520, 8 Am.Rep. 568;Locklin v. Moore, 57 N.Y. 360. And see cases cited in the opinions in those cases. In that respect a note, which is an absolute promise to pay, is said to differ from a check, which is a mere order.

[3] But it is also the law of this state, although it was early debated, that the failure to present a check within a reasonable time does not exonerate the drawer, unless there has been a loss. Little v. Phenix Bank, 2 Hill, 425;Carroll v. Sweet, 126 N.Y. 19, 27 N.E. 763, 13 L.R.A. 43. The Negotiable Instruments Law (Consol.Laws, c. 38) § 147, provides:

“Where the instrument is made payable at a bank it is equivalent to an order to the bank to pay the same for the account of the principal debtor thereon. “

And this court in AEtna National Bank v. Fourth National Bank of N.Y., 46 N.Y. 82, 88, 7 Am.Rep. 314, said, per Allen, J:

“An acceptance or promissory note thus payable [i.e., at a bank] is, if the party is in funds, that is, has the amount to his credit, equivalent to a check, and is, in effect, an order or draft on the banker in favor of the holder, for the amount of the note or acceptance. “

The reason for exonerating the drawer of a check in case of loss resulting from a failure to present it in a reasonable time is that the drawing of a check is virtually an appropriation, though not an assignment, pro tanto of the drawer's funds in the bank. See Little v. Phenix Bank, supra, 2 Hill at page 428.

[4] It is incumbent on the holder of the paper to secure payment, and loss resulting from his neglect should fall upon him, not on the drawer, who has no further duty to perform. I am unable to perceive why the same reason does not hold good in the case of a note payable at a bank where the maker has funds to meet it at maturity, especially since such a note is by statute made the equivalent of a check. To the extent that he has appropriated his credit, he is not called upon to look after it, but discharges his duty by keeping his account good. None of the cases in this jurisdiction holding that the maker of a note payable at a bank is not exonerated by the holder's failure to present it for payment involved the question of a loss resulting from such failure. I find nothing in any of them except the dictum in the Indig Case to the effect that the loss in such case falls on the maker.

The obligation to present the note, if it existed, bears on the obligation to follow it up, when it is sent by nail to the payee bank “for collection.” I shall not discuss the numerous cases in other jurisdictions holding that it is negligence per se to send a bill for collection to the drawee or payee bank. There may be, in that respect, a distinction between a note and a check or a bill of exchange and between liability of an agent to its principal and liability of the holder to the maker of a note. At any rate, the Indig Case has generally been regarded as having settled the law in this state the other way and in accordance with what is believed to be the custom. However, by sending the note to the Watkins bank the plaintiff created a situation likely to, and which in fact did, mislead the defendants and result in loss. Upon being informed that the note was there, they directed, that it be charged to their account. That was unnecessary (AEtna National Bank v. Fourth National Bank of N.Y., supra, at page 88 of 46 N.Y., 7 Am.Rep. 314), but it indicated a lively interest in caring for their paper. Nothing more remained for them to do, as, of course, they could wait, as business men customarily do, for the return of the note with their canceled vouchers. The plaintiff's act thus led the defendants to suppose that this credit had been applied to pro tanto to the payment of the note, and lulled them into taking no further measures either to pay the note or to draw upon the credit thus appropriated.

However, it is unnecessary to decide whether the plaintiff owed the defendants the duty in the first instance to present the note, or whether its failure to make any inquiry for a week after sending the note by mail to the payee bank for collection discharged the makers, loss having resulted. The foregoing are at least cogent reasons for holding that, in making the payee bank an agent to collect, the holder takes the risk of loss resulting from the latter's negligence and assumes responsibility for its acts within the scope of its authority. That such an agency was created in this case is plain, even though, as was said in the Indig Case, the mere spending of a note by mail to the bank where it is payable be in effect the same as presenting it over the bank's counter. The Watkins bank was the agent of the plaintiff to collect, but not of the defendants to pay.

[5] Although it has sometimes been said that by making a note payable at a bank where the maker keeps an account he constitutes the bank his agent to pay it, that statement will not bear analysis. The relation of debtor and creditor, not of agent and principal, exists between a bank and its depositor. AEtna National Bank v. Fourth National Bank of N.Y., supra; Jordan v. National Shoe & Leather Bank of N.Y., 74 N.Y. 467, 30 Am.Rep. 319;Straus v. Tradesmen's Nat. Bank, 122 N.Y. 379, 25 N.E. 372;Shipman v. Bank of the State of New York, 126 N.Y. 318, 27 N.E. 371, 12 L.R.A. 791, 22 Am.St.Rep. 821; Cassidy v. Uhlmann, 170 N.Y. 505, 63 N.E. 554.

[6] The money deposited becomes a part of the bank's general funds. The bank impliedly contracts to pay its depositor's checks, acceptances, notes payable at the bank, and the like, to the amount of his credit. Citizens' National Bank of Davenport v. Importers' & Traders' Bank of N.Y., 119 N.Y. 195, 23 N.E. 540. But in discharging its implied obligation it pays its own money as a debtor, not its depositor's money as an agent. As has already been shown, a note payable at a bank where the depositor has an account is, in respect to being an order to pay, the precise equivalent of a check. Plainly, then, the bank bears no relation of trust or agency to its depositor in respect of paying either notes or checks. It is a mere drawee answerable to the drawer for a breach of its implied contract obligation to honor the draft. It necessarily follows that the transaction between the defendants and the Watkins bank amounted to payment, or that the failure to secure payment was due...