Klemm v. Labor Co-Operative Nat. Bank of Paterson

• Decision Date: 26 October 1936
• Docket Number: No. 40.,40.
• Citation: 187 A. 640
• Parties: KLEMM v. LABOR CO-OPERATIVE NAT. BANK OF PATERSON et al.
• Court: New Jersey Supreme Court

187 A. 640

KLEMM

v. LABOR CO-OPERATIVE NAT. BANK OF PATERSON et al.

No. 40.

Court of Errors and Appeals of New Jersey.

Oct. 26, 1936.

The CHIEF JUSTICE, PARKER, Justice, and DEAR, Judge, dissenting.

Appeal from Circuit Court, Passaic County.

Action by Joseph Klemm against the Labor Co-operative National Bank of Paterson and others. Judgment for plaintiff, and defendants appeal.

Reversed.

Harry Joelson, of Paterson (Edward F. Merrey, of Paterson, of counsel), for appellants.

Cohn & Kohlreiter, of Paterson (Peter Cohn, of Paterson, of counsel), for respondent.

HEHER, Justice.

The primary question for decision is whether, as averred in the complaint, a special contract of bailment arose in respect of a portion of moneys concededly deposited by plaintiff with defendant bank upon general account. Conceiving the evidence to be in conflict, the trial judge submitted the issue to the jury; and it was resolved in favor of the plaintiff depositor. As to the moneys thus claimed, the depositary was found to be a bailee. By a motion to nonsuit and exceptions to the charge, the defendant bank challenged the existence of any evidence to support this finding of fact and the consequent judgment.

These are the pertinent facts and circumstances: On January 3, 1929, the plaintiff depositor opened a savings account with the defendant bank, organized under the National Bank Act. 12 U.S.C.A. § 21 et seq. On February 24, 1933, when the sum to his credit in the account totaled $4,147.13, he called at the bank, presented his passbook to the teller in charge, and demanded payment of $4,000 so credited to him. While he testified that he entertained what he conceived to be a substantial doubt as to the bank's solvency, and for that reason decided to withdraw the sum in question and satisfy a mortgage on a property owned by him in Mt. Vernon, N. Y., he did not communicate his fears to the teller, nor in anywise suggest this asserted underlying reason for the proposed withdrawal. He informed that officer that his purpose was to liquidate the mortgage referred to. The teller, reminding him of the risk of loss if the withdrawal were made in currency, proposed that he make payment of the required sum by checks drawn upon the account. The depositor promptly acquiesced in the suggestion, and signed two checks upon the account, each in the sum of $2,000. The teller pursued what the proofs disclose was the customary banking practice where checks upon a savings account are to be honored without presentation of the passbook. He indorsed the checks "O. B. February 24, 1933—G. P. D. charge Book No. 17217," which in banking parlance means "taken off the book," and, without effecting a change in the basic relationship, obliges the bank to honor the checks when presented for payment, properly indorsed, without the passbook. The understanding was that these checks would be delivered to the mortgagee in satisfaction of the mortgage, and used by him in the customary manner of commercial checks. The teller noted the withdrawals on the passbook, and there the transaction ended so far as the bank's books of account were concerned. But the depositor quoted the teller as saying: "We are taking this $4,000 off your book and we will put it on the side, and any time these checks is (sic) going to come in they will be paid." On cross-examination, he said the teller undertook "to put that money on the side, from all other moneys—in a trust fund, that nobody can use that money, not even the bank can use it." The uncontradicted evidence is that there was no segregation of a fund to meet these checks upon presentment, nor was there any transfer of the moneys upon the bank's books to any other account. There were no ledger or other book entries. In the normal course, these were not required until the payment of the outstanding checks. The depositor intended to journey to Mt. Vernon within the week for the purpose of delivering the checks to his mortgagee, but the plan was frustrated by illness. On March 6, 1933, before his recovery, the bank was closed by the President's proclamation of a bank holiday, and did not reopen because of insolvency. It was taken over by the Comptroller of the Currency, who designated a conservator to take charge of its affairs. The depositor's demand upon the conservator for payment of the checks was refused.

National banks are agencies of the federal government, created for public purposes, and are subject to the paramount authority of the Congress. Regulation conflicting with federal laws is beyond the sphere of legitimate state action. The National Bank Act (12 U.S.C.A. §§ 91, 194) embodies a policy of uniformity in the treatment of the depositors of an insolvent bank, and, in particular, a ratable division of its assets. The courts of federal jurisdiction, whose adjudications are of course controlling, have given rigid adherence to this concept, so much so that the ratable distribution provision of section 194 of the act has been construed as effecting repeal of an earlier statute granting a general preference to the United States on the insolvency of its debtor. Jennings v. United States Fidelity & Guaranty Co., 294 U.S. 216, 55 S.Ct. 394, 79 L.Ed. 869, 99 A.L.R. 1248; Old Company's Lehigh v. Meeker, 294 U.S. 227, 55 S.Ct. 392, 393, 79 L.Ed. 876; Davis v. Elmira Savings Bank, 161 U.S. 275, 290, 16 S.Ct. 502, 40 L.Ed. 700; Texas & Pacific Ry. Co. v. Pottorff, 291 U.S. 245, 54 S.Ct. 416, 78 L.Ed. 777; Cook County National Bank v. United States, 107 U.S. 445, 2 S.Ct. 561, 566, 27 L.Ed. 537. In the last-cited case Mr. Justice Field said that the ratable division section of the act "provides for the distribution of the entire assets of the bank, giving no preference to any claim except for moneys to reimburse the United States for advances in redeeming the notes." The primary consideration underlying this policy is the necessity of maintaining unimpaired public confidence in the fairness and impartiality of the national banking laws and the administration of the system. Texas & Pacific Ry. Co. v. Pottorff, supra; Davis v. Elmira Savings Bank, supra.

The fundamental deficiency in the depositor's claim to a preference is that a trust res did not result from the transaction in question. The relation of debtor and creditor, arising from the general deposit, was not converted into one fiduciary in character. The money in question had not been paid over the counter as a special deposit, thereby imposing upon the teller, under the doctrine of a continuing trust, the duty of maintaining the...