City of Douglas v. Federal Reserve Bank of Dallas

• Decision Date: 25 November 1924
• Docket Number: No. 4424.,4424.
• Citation: 2 F.2d 818
• Parties: CITY OF DOUGLAS v. FEDERAL RESERVE BANK OF DALLAS.
• Court: U.S. Court of Appeals — Fifth Circuit

2 F.2d 818 (1924)

CITY OF DOUGLAS v. FEDERAL RESERVE BANK OF DALLAS.

No. 4424.

Circuit Court of Appeals, Fifth Circuit.

November 25, 1924.

Harry E. Pickett, of Douglas, Ariz., Cleon T. Knapp, of Bisbee, Ariz., James P. Boyle, of Douglas, Ariz., and Ed. M. Whitaker and W. M. Peticolas, both of El Paso, Tex., for plaintiff in error.

E. B. Stroud, Jr., of Dallas, Tex., and A. H. Culwell, of El Paso, Tex. (E. B. Stroud, Jr., of Dallas, Tex., and Turney, Bruges, Culwell, Holliday & Pollard, of El Paso, Tex., on the brief), for defendant in error.

Before WALKER and BRYAN, Circuit Judges, and DAWKINS, District Judge.

DAWKINS, District Judge.

For a valuable consideration the county of Cochise, state of Arizona, delivered to the plaintiff, city of Douglas, said state, a check drawn upon the Central Bank of Wilcox, Ariz., for the sum of $5,000, dated December 22, 1920, which the payee city deposited in the First National Bank of Douglas on December 24th. On the same date the latter bank forwarded the check to the Federal Reserve Bank, El Paso Branch, the proceeds upon collection to be remitted for the credit of the city of Douglas. The 25th being a holiday (Christmas), and the 26th a Sunday, the check was in the hands of the bank at El Paso on December 27th, and on that date it was by said bank forwarded direct to the payee bank at Wilcox for payment. The bank at Wilcox stamped it "Paid," and transmitted in lieu thereof its own cashier's check for $6,426.17 (evidently covering, in addition, other items), drawn upon the Central Bank of Phœnix, Phœnix, Ariz., payable to the Federal Reserve Bank. The Reserve Bank forwarded this last-mentioned check to the branch of that institution at Los Angeles, Cal., and it in turn sent the cashier's check direct to the Central Bank of Phœnix for payment, where it was protested for nonpayment. The practice of sending the checks direct seems to have been authorized by special ruling of the Federal Reserve Board. The Central Bank of Wilcox failed on January 8th, and the Central Bank of Phœnix likewise closed its doors on January 19, 1921.

Thereupon the city of Douglas sued the Federal Reserve Bank of Dallas, of which the one at El Paso is a branch, setting up these facts and charging the defendant with negligence, in that if, instead of sending the original check direct to the payee bank, it had been sent to some other agency in the town of Wilcox, the money would have been paid, because the drawer at the time had sufficient funds on deposit with the Wilcox Bank with which to meet the check; that the defendant knew the Central Banks of Wilcox and Phœnix were insolvent, but nevertheless thus negligently handled the matter, in violation of the usual and customary rules of banking, and thereby rendered itself liable for the loss. Plaintiff accordingly prayed for judgment for the face of the check as the amount of its damages suffered through the alleged fault of the defendant.

One of the defenses specially pleaded below was that the petition disclosed no cause of action, in that there was no privity of contract between plaintiff and defendant, and that the former's remedy was to sue the initial bank of deposit, the First National Bank of Douglas, Ariz. This contention having been sustained by the trial court after a hearing on the merits, plaintiff prosecutes this writ of error.

The question presented is as to whether this court shall follow what is known as the "New York," as distinguished from the "Massachusetts," rule. Under the New York rule the depositor of a dishonored check, the payment of which has failed through the fault of a transferee of the initial depositary, must proceed against the said initial bank, upon the theory that there is no privity between him and the subsequent holders, while in Massachusetts he may sue directly the bank through whose fault the loss occurred. Exchange National Bank v. Third National Bank, 112 U. S. 276, 5 S. Ct. 141, 28 L. Ed. 722; Federal Reserve Bank of Richmond v. Malloy, 264 U. S. 160, 44 S. Ct. 296, 68 L. Ed. ___, 31 A. L. R. 1261. In the latter case the Supreme Court uses this language:

"The state decisions in respect of the liability of a correspondent bank to the owner of a check forwarded for collection by the initial bank of deposit are in conflict beyond the possibility of reconciliation. A number of states, following the `New York rule,' so called, have held that there is no such direct liability, but that the initial bank alone is responsible to the owner. On the other hand, an equal, if not a greater, number of states, following the `Massachusetts rule,' have held exactly the contrary, viz. that the initial bank, by the mere fact of deposit for collection, is authorized to employ subagents, who thereupon become the agents of the owner and directly responsible to him for their defaults. This court, in Exchange National Bank v. Third National Bank, 112 U. S. 276, 5 Sup. Ct. 141, 28 L. Ed. 722, after reviewing the two lines of decisions, approved the `New York rule.' But the rule may, of course, be varied by contract, express or implied. 112 U. S. 289, 5 Sup. Ct. 141, 28 L. Ed. 722. Here the relations of the drawee to the initial bank of deposit are controlled by the Florida statute, with respect to which it must be presumed they dealt with each other. This statute had the effect of importing the `Massachusetts rule' into the contract, with the result that the initial bank had implied authority to intrust the collection of the check to a subagent, and that subagent, in turn, to another, and the risk of any default or neglect on their part, rested upon the owners. 112 U. S. 281, 5 Sup. Ct. 141, 28 L. Ed. 722. It follows that the action was properly brought against the Richmond bank."

It appears to be conceded that the federal courts have followed the New York rule, but is contended the facts of the present case take it without the rule, for the reason that there was a special undertaking, such as is referred to in the case last cited, and in which the court declared: "But the rule may, of course, be varied by contract, express or implied." But in applying the doctrine of the Massachusetts rule in that case it said: "Here the relations of the payee to the initial bank of deposit are controlled by the Florida statute, with respect to which it must be presumed they dealt with each other. The statute had the effect of importing the `Massachusetts rule' into the contract, with the result that the initial bank had implied authority to intrust the collection of the check to a subagent, and that subagent, in turn, to another, and the risk of any default or neglect on their part rested upon the owners." Prior to this decision the...