State v. Kingston

• Decision Date: 03 April 1934
• Citation: 254 N.W. 126,215 Wis. 80
• Parties: STATE v. KINGSTON, COM'R OF BANKING.
• Court: Wisconsin Supreme Court

215 Wis. 80

254 N.W. 126

STATE

v.KINGSTON, COM'R OF BANKING.

Supreme Court of Wisconsin.

April 3, 1934.

Appeal from a portion of the judgment of the Circuit Court for Dane County; August C. Hoppmann, Circuit Judge. Reversed.

See, also, State v. United States Fidelity & Guaranty Co. (Wis.) 254 N. W. 130.

This action was begun on December 15, 1932, by the state of Wisconsin against A. C. Kingston, Commissioner of Banking of the State of Wisconsin, and his successors in office, to establish a preferred claim against the assets of the Capital City Bank of Madison, Wis., in the principal sum of $73,810, representing the proceeds of bonds and coupons belonging to the state, intrusted to the Capital City Bank for collection, prior to and including November 4, 1931. Upon the trial, the court denied the plaintiff preference as to $42,113.75 collected prior to November 4, 1931, and awarded the plaintiff preference for the remaining items. From paragraph 2 of the judgment entered accordingly on the 12th day of August, 1933, the plaintiff appeals. The defendant served and filed a notice of motion to review.

The Capital City Bank, hereinafter referred to as the Madison Bank, was a duly authorized state depository and the account of the State of Wisconsin was carried in the name of “Solomon Levitan, State Treasurer.” On October 15, 1931, the State Treasury Department sent by messenger to the Madison Bank bonds and coupons in the total sum of $74,372.50. The letter of transmittal which accompanied the bonds and coupons stated that the bonds and coupons were given to the Madison Bank for “collection and credit.” The next day or on October 16, 1931, the Madison Bank sent to the Continental Illinois Bank & Trust Company of Chicago, hereinafter called the Chicago Bank, bonds and coupons in the total sum of $66,510. The letter of transmittal from the Madison Bank to the Chicago Bank states: “We are enclosing herewith for collection and credit the items enumerated below.” The Madison Bank retained in its vaults for local collectioncoupons aggregating $7,862.50, the proceeds of which were remitted to the Capital City Bank on November 3, 1931. Out of the bonds and coupons sent to the Chicago Bank on October 16, 1931, there were returned to the State Treasurer twenty-five coupons in which the city of Toronto was the obligor, amounting in all to $562.50. These bonds were returned because the State Treasury Department was unwilling to pay the rate of exchange demanded for their collection. As the bonds and coupons were collected by the Chicago Bank, the Madison Bank was given credit therefor upon the books of the Chicago Bank, and the Chicago Bank mailed advices of credit to the Madison Bank. There were eighty-seven such advices. It appears that the Chicago Bank made collections as follows for the different periods involved in this action:

(a) Collections up to and including November 4, 1931, $42,113.75.

(b) Collections between November 5, 1931, and November 10, 1931, inclusive, $8,777.50.

(c) Collections after November 10, 1931, $15,056.25.

On November 4, 1931, the State Treasury Department sent a letter to the Madison Bank, which asked the bank to remit the proceeds of collection instead of crediting the State Treasurer's account. The defendant denied that the bank received this letter, but the trial court found that the letter was received by the Madison Bank in the regular course of mail and came to the attention of its president. The bank treated the transaction upon its books as follows: On October 16th, the bank entered the bonds and coupons which it had received the day before in its collection register. On October 31, 1931, the Madison Bank charged the Chicago Bank with the full amount of these bonds and coupons, $73,810, in its general journal, although bonds and coupons in the sum of $65,947.50 were then actually in the hands of the Chicago Bank for collection. The corresponding credit entry to this debit was given to “Certificates of Deposit” in this journal. A pretended certificate of deposit was actually made out by the bookkeeper pursuant to instructions given by W. J. Hobbins, president, payable, not to the State Treasurer, but to the Capital City Bank. The State Treasurer knew nothing about the execution of the so-called certificate of deposit. It was never issued by the bank but was kept as a memorandum in the bookkeeper's drawer during the daytime and in the vault at night. A book of the bank, entitled “Record of Certificates of Deposit Issued,” contains entries under date of October 31, 1931, showing that a certificate of deposit in the sum of $73,810 was deposited by the State Treasurer and issued to the Capital City Bank. The Capital City Bank closed its doors on November 10, 1931.

Upon the trial the court found that the plaintiff was entitled to preference on account of the following items:

The amount collected locally by the Madison Bank for which no credit was given to the plaintiff, $7,862.50.

Amount collected by the Chicago Bank after November 4th, when the state changed the instructions from “collect and credit” to “collect and remit,” until the closing of the bank on November 10th, $8,777.50.

Amount collected by the Chicago Bank after the Madison Bank closed, $15,046.25.

J. E. Finnegan, Atty. Gen., and Benjamin Poss, Special Counsel, and Joseph P. Brazy, both of Milwaukee, for the State.

Vroman Mason, of Madison (Theodore W. Brazeau, of Wisconsin Rapids, and Thomas N. Burke, of Madison, of counsel), for respondent.

ROSENBERRY, Chief Justice.

The precise question involved here is whether or not the plaintiff is entitled to a preferred claim against the assets of the defunct Capital City Bank pursuant to the provisions of the bank collection code.

In the case of Federal Reserve Bank v. Malloy, 264 U. S. 160, 44 S. Ct. 296, 68 L. Ed. 617, 31 A. L. R. 1261, decided by the United States Supreme Court on the 18th day of February, 1924, it was held that a bank undertaking to collect commercial items was an agent, and that as such it was not authorized to receive anything in payment except cash. The result of this decision was to make every collecting bank a guarantor of the solvency of its correspondents for the reason that it was customary in the transaction of such business to receive credits and drafts in lieu of cash. If the collecting bank accepted a draft or check and payment was refused, the collecting bank became liable to its principal. Various devices were adopted by bankers to avoid the effect of this decision, the most common of which was that the collecting bank receive authority from its customer to accept drafts and credits. Prior to the decision there was a great divergence of opinion as to when the relation of principal and agent ceased and that of debtor and creditor began in cases where items were deposited by the customer for collection and upon collection were ordinarily placed to the credit of the customer. Extended discussions of this matter are to be found in the banking law journals and the law reviews of the time. See 43 Harvard Law Review, 307. To deal effectively with the situation, the so-called bank collection code was prepared and was adopted in Wisconsin by chapter 354 of the Laws of 1929 and is now section 220.15, Wis. Stats. At the close of the year 1931, the code had been adopted in eighteen states.

[1] It is contended on behalf of the defendant that the bank collection code has no application under the facts of this case for the reason that the letter of instructions directed the bank to “collect and credit.” Subdivision (2) provides: “Except as otherwise provided by agreement and except as to subsequent holders of a negotiable instrument payable to bearer or indorsed specially or in blank, where an item is deposited or received for collection, the bank of deposit shall be agent of the depositor for its collection and each subsequent collecting bank shall be subagent of the depositor but shall be authorized to follow the instructions of its immediate forwarding bank and any credit given by any such agent or subagent bank therefor shall be revocable until such time as the proceeds are received in actual money or an unconditional credit given on the books of another bank, which such agent has requested or accepted. * * *”

We see no reason why under the code or the common law a bank may not be a collecting agent or collecting bank although either by instructions or the usual and customary course of business the amount of the collection when made is to be deposited...