Spokane & Eastern Trust Co. v. United States Steel Products Co.

• Decision Date: 02 July 1923
• Docket Number: 3983.
• Citation: 290 F. 884
• Parties: SPOKANE & EASTERN TRUST CO. v. UNITED STATES STEEL PRODUCTS CO.
• Court: U.S. Court of Appeals — Ninth Circuit

290 F. 884

SPOKANE & EASTERN TRUST CO. v. UNITED STATES STEEL PRODUCTS CO.

No. 3983.

United States Court of Appeals, Ninth Circuit.

July 2, 1923

Rehearing Denied August 6, 1923.

F. H Graves, W. G. Graves, and B. H. Kizer, all of Spokane, Wash for appellant.

Walter Shelton, of San Francisco, Cal., and John H. Powell and Peters & Powell, all of Seattle, Wash., for appellee.

Before GILBERT, ROSS, and HUNT, Circuit Judges.

HUNT Circuit Judge.

This is a suit by the Steel Company, appellee, to recover the proceeds of a check from the Spokane & Eastern Trust Company a banking corporation, called the Spokane Bank, appellant. The Central Bank & Trust Company of Yakima, called the Central Bank, and Farnsworth as director of taxation and examination of the state of Washington, were made defendants, the Central Bank being regarded by the Steel Company as in a trust relationship alleged to exist between itself and plaintiff, while Farnsworth, as director aforesaid, was included because he was liquidating the Central Bank at Yakima as an insolvent bank, and was exercising the functions of a receiver. From a decree in favor of the Steel Company and against the Spokane Bank, the bank appeals.

Shortly before January 19, 1921, the Yakima Hardware Company mailed its check, drawn on the Central Bank & Trust Company, for approximately $47,000, to the Steel Company. The Steel Company, a customer of the Seattle National Bank, received the check, and on January 19, 1921, indorsed it to the order of the Seattle National Bank and delivered it to that bank for collection and deposit to the credit of the Steel Company. On the deposit slip were these words:

'In receiving checks or other items on deposit payable elsewhere, * * * this bank assumes no responsibility for the failure of any of its direct or indirect collecting agents, and shall only be held liable when proceeds in actual funds or solvent credits shall have come into its possession. Under these conditions items previously credited may be charged back to the depositor's account.'

On the same day the Seattle Bank forwarded the check, with other items, by mail to the Central Bank at Yakima, through which it made its Yakima collections. The remittance letter said:

'We inclose for returns the following cash items, which bear this stamp. N.P. 19-7 or similar authority of preceding indorser, or the words No. Pro. Wire nonpayment of items $250 or over. Deliver documents only on payment of drafts attached unless otherwise instructed.'

The Central Bank of Yakima, not being a member of the Yakima clearing house, cleared through the Yakima Valley Bank. The Valley Bank received the items mailed in the letter of the Seattle Bank to the Central Bank, and on January 21st the items, with others aggregating approximately $59,000, were paid to the Central Bank; the Valley Bank retaining about $1,500 on deposit to the credit of the Central Bank. The Valley Bank turned over to the Central Bank two drafts, one for $45,000, drawn on the Bank of California at Tacoma, and the other for $3,000, drawn on the Fidelity National Bank of Spokane. However, the Central Bank did not forward any of the proceeds of the check to the Seattle National Bank, but transmitted the two drafts and other items to the appellant bank at Spokane, and then drew a draft on the appellant bank at Spokane in favor of the Seattle National Bank for approximately $51,000, the full amount of the collection items received by the Central Bank from the Seattle National Bank. On the following day, January 22d, the Spokane Bank received the remittances from the Central Bank of Yakima, and deposited the same to the credit of that bank, and on the same day collected at Spokane the draft for $3,000, and on the 24th of January collected the draft for $45,000 at Tacoma. On January 26th the draft in favor of the Seattle National Bank was presented to the Spokane Bank.

Prior to the presentation of the draft, the Spokane Bank learned that the draft upon it had been issued and was outstanding, and charged back to the Central Bank at Yakima certain rediscounts and other paper indorsed by the Central Bank of Yakima, and in this manner sought to apply all the proceeds of the Steel Company check to an indebtedness of the Central Bank. When the Seattle check or draft was presented on January 26th, payment was refused, and afterwards, when demand was made by the Steel Company to pay over the proceeds of the check so received by the Spokane Bank, payment was refused. When the Seattle Bank was advised of the nonpayment of the draft, it charged back to the Steel Company the amount of the check for which the Seattle Bank had given a credit, and the Steel Company never has received any return on account of its check. It is not disputed that the Central Bank & Trust Company of Yakima was in fact insolvent during January, 1921, and that it was closed by the bank examiner on January 27th thereafter.

Looking to the question whether the Central Bank ever had title to the Hardware Company's check, sent to it by the Seattle Bank, we are of the opinion that the writings between the remitting bank and the collecting bank at Yakima not only fail to disclose consent to any relationship of debtor and creditor, but affirmatively show that the relationship became one whereby the collecting bank was a trustee of the proceeds collected. We are also of the opinion that the Central Bank, at the time that it acted in the matter of collection, was insolvent and not in a position to become a debtor of the Steel Company. The rule as established by the weight authority is that where a bank transmits negotiable paper for collection and returns, the bank which receives the check and undertakes the collection is the agent of the principal, and becomes a trustee of the proceeds for the owner, and, except where consent is given, the collecting bank cannot avoid such relationship and create that of mere debtor and creditor. Among many cases where the rule is clearly stated are: Holder v. Western German Bank, 136 F. 90, 68 C.C.A. 554; Continental Nat. Bank v. Weems, 69 Tex. 489, 6 S.W. 802, 5 Am.St.Rep. 85; Nat. Reserve Bank v. Nat. Bank, 172 N.Y. 102, 64 N.E. 799; Titlow v. McCormick, 236 F. 209, 149 C.C.A. 399. Nor is such trust relationship necessarily extinguished by the fact that the collecting bank has commingled the funds collected with its own, or that at other times the collecting bank has, in acting for the remitting bank, pursued a method of remitting by draft or other form not in specie.

We do not understand Commercial Bank v. Armstrong, 148 U.S. 50, 13 Sup.Ct. 533, 37 L.Ed. 363, as in conflict with the rules stated. There the contract required a settlement between the banks only upon certain days of each month, and under the facts the court concluded that the collections made were not to be placed on special deposit and held until the day for remitting, but were to be treated as a general deposit, the transmitting bank being regarded as a general depositor. The court, however, in considering the proceeds of collections made by subagents, regarded the receiver as a trustee for the proceeds, and held that title to such proceeds remained in the owner, notwithstanding the collection and credit arrangement. The paper had been honored and paid, but the actual proceeds had not been transmitted to the failing bank, nor were they reduced to actual possession; the subagents claiming title to the proceeds. The marked difference between that case and this is that in the one an arrangement showing intention to extend credit was found, while in the other the transaction was intended to be a cash one without extension of credit.

Bowman v. Bank, 9 Wash. 614, 38 P. 211, 43 Am.St.Rep. 870, is also relied upon by appellant. The case undoubtedly sustains appellant's argument to the effect that where there is no special agreement between them, by reference to the general banking custom in Washington, the collecting bank was not to hold the money collected as a special deposit and remit in specie, but was expected to commingle such money with its general funds and make settlement by means of a draft on another bank, and that when the collection is made the relation between the collecting bank and the correspondent or customer for whom it makes collection is...