FIDELITY-PHILADELPHIA T. CO. v. Philadelphia-Girard Nat. Bank

• Decision Date: 15 August 1929
• Docket Number: No. 4049.,4049.
• Citation: 33 F.2d 649
• Parties: FIDELITY-PHILADELPHIA TRUST CO. et al. v. PHILADELPHIA-GIRARD NAT. BANK.
• Court: U.S. Court of Appeals — Third Circuit

33 F.2d 649 (1929)

FIDELITY-PHILADELPHIA TRUST CO. et al. v. PHILADELPHIA-GIRARD NAT. BANK.

No. 4049.

Circuit Court of Appeals, Third Circuit.

June 24, 1929.

Rehearing Denied August 15, 1929.

Percival H. Granger, Reber, Granger & Montgomery, Breeding, Burkhardt & Harris, and Roberts & Montgomery, all of Philadelphia, Pa., for appellants.

Arthur Littleton, of Philadelphia, Pa. (Morgan, Lewis & Bockius, of Philadelphia, Pa., of counsel), for appellee.

Before BUFFINGTON, WOOLLEY, and DAVIS, Circuit Judges.

WOOLLEY, Circuit Judge.

The District Court dismissed the plaintiffs' bill praying that the defendant bank pay to them, as trustees in bankruptcy of the maker of several promissory notes, the market value of the pledged collateral which the defendant bank, holder of the notes, had sold and, as they claimed, had unlawfully converted. The plaintiffs appealed.

The defendant bank, which we shall call the "city bank," is a national banking institution organized as a result of a merger between several banks with its banking house in the City of Philadelphia. Frank C. McCown, a stock and bond broker, individually and trading as McCown & Company, borrowed from time to time on notes accompanied with collateral substantial sums of money from the constituents of the city bank before the merger and thereafter from that bank itself aggregating, at the time in question, nearly $500,000. We shall for convenience treat the transactions as though they had been with the city bank alone.

As a metropolitan bank, the defendant had numerous correspondent banks in the suburban districts and in the country beyond to which we shall refer as the "country banks." These banks kept balances with the city bank which, when requested, it invested in notes it considered good and frequently in notes it had itself taken. The practice was somewhat as follows:

A country bank desiring to have, say, $10,000 of its balance put out on a loan would telephone the city bank to that effect. Thereupon the city bank would, by bookkeeping entries, withdraw $10,000 from the country bank's balance and put it in one of its loans, notifying the debtor that it had done so, and also notifying the country bank, giving the name of the debtor and a list of the collateral accompanying the note. The note of the debtor would not be endorsed to the country bank but would remain as originally drawn in the city bank's possession. The debtor's note with the collateral attached would, however, be segregated and set apart in an envelope with the name of the country bank upon it and proper notation made on the books of the city bank that the note and collateral had been so appropriated to the country bank's account, and, though remaining with the city bank, the note and its collateral would thereafter be regarded the property of the country bank. The portion of the McCown loans with the city bank which is involved in this case was represented by five negotiable notes for $20,000, $25,000, $40,000, $50,000 and $50,000, respectively, allocated to and held in that way by several country banks.

In January, 1927, McCown became insolvent and made an assignment for the benefit of his creditors. Learning of his insolvency and assignment, the defendant city bank at once got in touch with the various country banks and suggested that they authorize it to take them out of the loans, which authority the country banks promptly gave. Thereupon the city bank, through a reverse formula of bookkeeping entries and notice to parties interested, took back these five notes with their collateral and held them as its own. Thereafter the city bank, having thus reacquired the notes and believing them restored to their original condition, that is, evidencing loans which it had made to McCown, treated them as such and, after due notice and strictly pursuant to authority contained in the notes themselves, sold as much of the collateral as was necessary to pay the five notes so reacquired and also the remainder of its other loans to McCown for which the individual collateral was not sufficient, and turned over the balance of collateral and cash with a statement of account to the then representatives of McCown. Subsequently bankruptcy ensued, and McCown's trustees, by this action, complained of the conduct of the city bank and prayed for a decree requiring it to pay to them the market value of all securities which it had so converted to its own use.

Preliminary to a discussion of the questions involved it may be well to view the legal status of the several parties in this situation. The relation between McCown and the city bank with reference to the five collateral notes was originally that of debtor and creditor, and also pledgor and pledgee. These relations also existed between them as to other notes given by McCown to, and at that time held by, the city bank. Long before his insolvency and bankruptcy, McCown had by the five notes in question made contracts with the city bank and its transferees in respect to the disposition of the collateral which were definitely expressed in their terms. Although one of the notes differed from the other four in that in this one the power to dispose of the collateral and apply the proceeds to any other of the maker's liabilities was given "the holder" and in the others it was given "the said bank" (yet in the latter there was an expression which gave the transferees of the said bank, and their transferees, all the powers and rights which were originally given the bank), we agree with the learned trial judge that the city bank was at the time in question holder or transferee of all the notes with the original powers and rights restored to it on reacquiring them.

The plaintiffs do not, and indeed cannot, deny that if McCown had not become insolvent the city bank could have reacquired the notes from the country banks and would thereupon have become possessed of all the rights which the country banks theretofore had in them and in the collateral securing them. Short of paying off the notes in full McCown could do nothing to prevent the city bank from acquiring such rights along with the notes or from exercising those rights as holder or transferee, and it is equally true that after the city bank had reacquired them McCown could not tender payment to the country banks and get back the collateral. The reason for this is obvious. McCown's notes were negotiable. He thus had set them adrift on the commercial sea and he was bound by their terms into whatever port they might go. They charted no course and contained no limitations of movement or use and (unless frustrated by his insolvency) the city bank could hold them, sell them, and, having sold them, could reacquire them, and on default sell the collateral and apply the proceeds to payment of the five notes and any excess to payment of other notes whose collateral was insufficient. Oleon v. Rosenbloom & Co., 247 Pa. 250, 93 A. 473, L. R. A. 1915F, 968, Ann. Cas. 1916B, 233.

This brings us to the fact of McCown's assignment for the benefit of creditors and to the question of its effect upon the transactions. We shall assume several things and regard them as facts for the purpose of this discussion; namely, that McCown, while solvent, gave the city bank five perfectly valid negotiable notes with power to the holder to sell the collateral and apply the proceeds to these and all other notes of the maker similarly held; that later McCown became insolvent and made an assignment for the benefit of his creditors; that before his insolvency and assignment the city bank had actually and completely transferred the five notes to country banks; that after his insolvency and assignment the city bank reacquired the notes from the country banks without any rights lingering in those banks; that before the city bank so reacquired them it had full knowledge of McCown's insolvency and assignment; and, finally, that bankruptcy of McCown ensued more than four months after the notes were originally acquired but within four months of the time they were reacquired and the collateral sold.

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