Jennings v. United States Fidelity Guaranty Co

• Decision Date: 04 February 1935
• Docket Number: No. 338,338
• Citation: 79 L.Ed. 869,99 A.L.R. 1248,55 S.Ct. 394,294 U.S. 216
• Parties: JENNINGS et al. v. UNITED STATES FIDELITY & GUARANTY CO
• Court: U.S. Supreme Court

294 U.S. 216

55 S.Ct. 394

79 L.Ed. 869

JENNINGS et al.

v UNITED STATES FIDELITY & GUARANTY CO.

No. 338.

Argued Jan. 16, 17, 1935.

Decided Feb. 4, 1935.

Messrs. John F. Anderson and George P. Barse, both of Washington, D.C., for petitioners.

Mr. Arthur L. Gilliom, of Indianapolis, Ind., for respondent.

[Argument of Counsel from page 217 intentionally omitted] Mr. Justice CARDOZO delivered the opinion of the Court.

A trust has been impressed upon the assets of a national bank in the hands of a receiver for the proceeds of a check collected through a clearing house before the closing of the bank by the Comptroller of the Currency. The question is whether the trust may be upheld.

On December 29, 1931, the Commercial Trust Company of Gary, Ind., as maker, delivered to the respondent, United States Fidelity & Guaranty Company, a check to the order of respondent in the sum of $2,196.89 upon the Gary State Bank of Gary, Ind., as drawee. The check, duly indorsed by the payee, was deposited in a bank in Indianapolis, and thereafter was transmitted for collection to the National Bank of America at Gary, Ind., being received for that purpose on December 31, 1931. At that time both the collecting bank (the National Bank of America) and the drawee bank (Gary State Bank) were members of the Gary Clearing House Association. In accordance with banking custom, the National Bank of America delivered to the local clearing house whatever checks in its possession were payable by the member banks (a total of $10,425.45) including the foregoing item of $2,196.89, and received in return the checks drawn on itself ($11,470.19). The outcome was a debit balance of $1,044.74, which it paid on the same day by a draft, thereafter duly honored, to the order of the clearing house. At the same time it delivered to the forwarding bank in Indianapolis a draft for $3,660.83, which covered along with other items the check for $2,196.89, collected from the drawee in the manner just described. Before the draft so transmitted could be honored, its maker, the collecting bank, had been forced to close its doors (January 4, 1932), and the Comptroller of the Currency was in possession of the business.

This action which was begun in a state court in Indiana and was thereupon removed to a United States District Court, was brought by the United States Fidelity & Guaranty Company, payee of the check for $2,196.89, against the collecting bank and Jennings, its receiver, to impress a trust upon the assets to the extent of the proceeds of collection, and for payment accordingly. The District Court held that the payee was entitled to a preference over the general creditors of the insolvent bank, and entered a decree for the face amount of the check with interest. United States Fidelity & Guaranty Co. v. National Bank of America, 4 F.Supp. 569. Upon appeal to the Circuit Court of Appeals for the Seventh Circuit, the decree was modified as to the interest, and as modified affirmed. National Bank v. United States Fidelity & Guaranty Co., 71 F.(2d) 618. A writ of certiorari brings the case here. 293 U.S. 543, 55 S.Ct. 112, 79 L.Ed. —-.

There was in force in Indiana in 1931 a statute known as the Bank Collection Code (Indiana Acts 1929, c. 164¹), which is applicable to national banks in so far as it is consistent with the policy or provisions, express or reasonably implied, of the National Bank Act (12 USCA § 21 et seq.) or of other federal acts of paramount authority. Lewis v. Fidelity & Deposit Co. of Maryland, 292 U.S. 559, 566, 54 S.Ct. 848, 78 L.Ed. 1425, 92 A.L.R. 794; First National Bank v. Missouri, 293 U.S. 640, 656, 44 S.Ct. 213, 68 L.Ed. 468. Under that Code (§ 2), the relation between the forwarding bank and the collecting bank is that of principal and agent until the agent has completed the business of collection. Whether a fiduciary relation continues even afterwards, upon the theory that the proceeds of the collection until remitted to the forwarder are subject to a trust, depends upon the circumstances. In the absence of tokens of a contrary intention, the better doctrine is, where the common law prevails, that the agency of the collecting bank is brought to an end by the collection of the paper, the bank from then on being in the position of a debtor, with liberty, like debtors generally, to use the proceeds as its own. Commercial Bank of Pennsylvania v. Armstrong, 148 U.S. 50, 13 S.Ct. 533, 37 L.Ed. 363; Marine Bank v. Fulton County Bank, 2 Wall. 252, 17 L.Ed. 785; Planter's Bank v. Union Bank, 16 Wall. 483, 501, 21 L.Ed. 473; Hecker-Jones-Jewell Milling Co. v. Cosmopolitan Trust Co., 242 Mass. 181, 185, 186, 136 N.E. 333, 24 A.L.R. 1148; Freeman's National Bank v. National Tube-Works, 151 Mass. 413, 418, 24 N.E. 779, 8 L.R.A. 42, 21 Am.St.Rep. 461; Manufacturers' National Bank v. Continental Bank, 148 Mass. 553, 558, 20 N.E. 193, 2 L.R.A. 699, 12 Am.St.Rep. 598; First National Bank of Richmond v. Wilmington & W.R. Co. (C.C.) 77 F. 401, 402; Philadelphia National Bank v. Dowd (C.C.) 38 F. 172, 183, 2 L.R.A. 480; Merchants' & Farmers' Bank v. Austin (C.C.) 48 F. 25, 32.² 'One who collects commercial paper through the agency of banks must be held to impliedly contract that the business may be done according to their wellknown usages, so far as to permit the money collected to be mingled with the funds of the collecting bank.' Freeman's National Bank v. National Tube-Works, supra. There is a contention for the respondent that the rule at common law has been modified by statute. We shall consider later on whether the change, if any, is material upon the record now before us.

At the closing of its doors on January 4, 1932, the collecting bank at Gary had finished the business of collection, and had arrived at the stage when it was subject to a duty, either as trustee or as debtor, to make remittance of the proceeds. In the method of collection there had been no departure from the ruling of this court in Federal Reserve Bank v. Malloy, 264 U.S. 160, 44 S.Ct. 296, 68 L.Ed. 617, 31 A.L.R. 1261, that an agent bank is at fault when it accepts anything but cash in the absence of custom or agreement for the acceptance of a substitute. To preclude the extension of that ruling to collections through a clearing house the Bank, Collection Code makes provision in section 9 (Acts Ind. 1929, c. 164) for media of payment that are to be deemed equivalent to currency. There may now be acceptance of a bank draft, or settlement through a clearing house in the customary manner, without involving the agent in liability for damages if the draft is dishonored or the credit subsequently revoked.³ On the other hand, when credit ceases to be provisional, or when the accepted instrument is paid, the collecting bank is liable as debtor, if not otherwise, to the same extent as if payment had been made in cash over the counter. One duty (the duty to collect) is at an end, and another (the duty to remit) has arisen in its place.

To say that a collecting agent may be held to the liability of a debtor 'as if' payment had been made in cash is not to say that the two methods of collection are equivalent for every other purpose. More particularly it does not mean that they are equivalent for the purpose of identifying a res to be subjected to a trust. The distinction is made definite by the controversy before us. What happened in the clearing house was this, that a check for $2,196.89, due to the collecting bank as agent or fiduciary, was used to cancel or extinguish liability upon a check or checks of equal amount due from it as principal, all with the sanction of statute and with the tacit assent of the forwarder or owner. At the close of the day there was not a dollar in the treasury of the agent that could be identified as part of the proceeds of collection or as a substitute therefor. If the money had been paid over the counter with the understanding that it was accepted as a special deposit (Blakey v. Brinson, 286 U.S. 254, 262, 263, 52 S.Ct. 516, 76 L.Ed. 1089, 82 A.L.R. 1288; People v. City Bank of Rochester, 96 N.Y. 32; Genesee Wesleyan Seminary v. United States Fidelity & Guaranty Co., 247 N.Y. 52, 55, 159 N.E. 720, 56 A.L.R. 964), the doctrine of a continuing trust would charge the agent with a duty to set the proceeds of collection apart from other assets, and hold them intact for transmission to the forwarder. Nothing of the kind was done. Nothing of the kind was required or expected to be done. On the contrary, the statute gave notice to the agent that instead of establishing a trust, it was at liberty to set off what was due to it in one capacity against what was owing by it in another, being liable, however, as debtor when the set off became final.

We are not concerned at this time with a constructive trust in the strict sense, a trust ex maleficio, which may be fastened upon a wrongdoer irrespective of intention. Pomeroy, Equity Jurisprudence, vol. 1, § 155; vol. 3, §§ 1044, 1046. There was no wrongdoing here, but conduct wholly regular, with the result that any trust existing must be one implied in fact. In that situation there is no basis for a holding that a trust was transferred from the proceeds of collection to an equivalent part of the cash resources of the agent, the beneficial interest of the principal being unaffected by the set off. Cf. Knatchbull v. Hallett, 13 Ch.Div. 696; Central National Bank v. Insurance Co., 104 U.S. 54, 68, 26 L.Ed. 693; Schuyler v. Littlefield, 232 U.S. 707, 34 S.Ct. 466, 58 L.Ed. 806. To draw such an inference, far from promoting intention, would ignore and override it. By a permitted course of dealing the proceeds of the check, instead of being deposited upon collection in the vaults of the collecting agent, were specifically appropriated to the discharge of other obligations. There was not even a partial or proportionate payment that could have found its way into the vaults, for the balance at the close of the...