The Citizens State Bank of Chautauqua v. The First National Bank of Sedan

• Decision Date: 06 May 1916
• Docket Number: 20,172
• Citation: 157 P. 392,98 Kan. 109
• Parties: THE CITIZENS STATE BANK OF CHAUTAUQUA, Appellee, v. THE FIRST NATIONAL BANK OF SEDAN, Appellant
• Court: Kansas Supreme Court

157 P. 392

98 Kan. 109

THE CITIZENS STATE BANK OF CHAUTAUQUA, Appellee, v. THE FIRST NATIONAL BANK OF SEDAN, Appellant

No. 20,172

Supreme Court of Kansas

May 6, 1916

Decided, January, 1916.

Appeal from Chautauqua district court; ALLISON T. AYRES, judge.

Judgment affirmed.

SYLLABUS

SYLLABUS BY THE COURT.

1. BANKING--Insolvent Bank May Not Give Preference to Creditors or Depositors. Section 499 of the General Statutes of 1909, as amended by section 1 of chapter 65 of the Laws of 1911, which prohibits a bank from giving a preference to any depositor or creditor by pledging the assets of the bank, applies only to a bank which is insolvent.

2. SAME. An agreement in a promissory note executed by a solvent bank, by which it agrees to give additional securities in the future upon demand of the lender, is a valid agreement only so long as the borrowing bank remains in a solvent condition. The collateral agreement is limited by the statute (Gen. Stat. 1909, § 499, amended by Laws 1911, ch. 65, § 1) which forbids a bank to give a preference to any depositor or creditor.

3. SAME--Agreement to Give Additional Securities to Bank's Creditor--Agreement Valid only so Long as Bank Remains Solvent. A solvent bank borrowed $ 10,000 from another bank and gave its promissory note, pledging at the same time certain of its assets as collateral security. The note contained an agreement to give additional security upon notification by the holder. Subsequently, when the borrowing bank was insolvent, its officers at the demand of the holder turned over additional assets of the bank to secure the indebtedness. Upon these facts it is held that the previous agreement did not create an equitable lien on the assets subsequently turned over, and that replevin will lie at the suit of the borrower to recover the assets turned over in violation of the statute.

4. SAME--A Preferred Creditor Can Not Retain Assets of Bank Transferred During Bank's Insolvency. Notwithstanding the statute which prohibits banks from preferring creditors contains no declaration that any act in violation thereof shall be void, it is held that a creditor who accepts a preference from an insolvent bank will not be permitted to retain the benefits of the transaction.

5. SAME--Replevin of Insolvent Bank's Assets. On the facts stated in the opinion it is held that it was not a condition precedent to the plaintiff's right to maintain the action of replevin that it tender back certain securities surrendered by the defendant at the time the additional securities were turned over.

A. M. Jackson, of Winfield, Sanford B. Ladd, and Charles E. Small, both of Kansas City, Mo., for the appellant.

S. M. Brewster, attorney-general, S. N. Hawkes, John L. Hunt, assistants attorney-general, and W. H. Sproul, of Sedan, for the appellee.

OPINION

PORTER, J.

The action in the district court was to recover possession of certain notes, mortgages and other evidences of debt, or their value. The plaintiff prevailed and the defendant appeals.

The First National Bank of Sedan is merely a nominal defendant, holding the securities in controversy for collection as the agent of the defendant, the Traders National Bank of Kansas City, Mo. At the time the action was brought the Citizens State Bank of Chautauqua, hereinafter referred to as the Chautauqua bank, was insolvent and in the hands of the state banking department. From August, 1911, this bank and the Traders National Bank, which will be referred to as the Kansas City bank, were correspondents, the Chautauqua bank keeping an account with the Kansas City bank, against which it frequently issued exchange. It had borrowed $ 10,000 from the Kansas City bank, evidenced by two notes which were due February 1, 1915. On January 26, 1915, it owed on one of these notes $ 5000, and on the other $ 3000. The money had been borrowed long before, and the notes had been renewed from time to time. The original and the renewals were in the same form, and contained the following provision:

"And being desirous of securing this note and all other liabilities to said bank, now existing or which may hereafter arise, we hereby pledge and deliver for that purpose, to said bank and its endorsees and assigns as collateral security for the payment of said note and said other liabilities, present and future, sundry notes, being all those hereto attached and all additions to them and all substitutions for them in the course of business, and we agree to give additional security to keep up the present margin should the market value of the above securities decline, upon notification to us by the holder of said note or liabilities or any of them, within twenty-four hours after receipt of said notice."

From October, 1914, until the time of the transaction in controversy, the Kansas City bank had complained that the Chautauqua bank had not remitted promptly the proceeds of collections sent by the Kansas City bank, and there was considerable correspondence over the matter. The Chautauqua bank had recently sent about $ 10,000 additional security, but the Kansas City bank had become suspicious as to the character of some of the collateral. Because of this, on January 23, 1915, it sent Mr. Alexander, its assistant cashier, to Chautauqua for the purpose of obtaining additional collateral. He took with him the collateral which the bank held (the face value of which amounted to about $ 25,000), and called the attention of Turner, cashier of the Chautauqua bank, to the appearance of some of it. Turner's explanations were not satisfactory, and Alexander informed him that he intended to stay until he got other collateral. Turner failed to keep an appointment with Alexander at the bank Saturday afternoon, and left town. On Monday Alexander, in company with a banker from Bartlesville, Okla., who came to Chautauqua in the interest of the Kansas City bank, went to the Chautauqua bank and found Mrs. Turner in charge. She informed them that she had heard nothing from her husband, but that she supposed he would be back. They asked her to turn over to them other collateral security, and explained that the Kansas City bank had a right to it, and that when the $ 8000 was paid the surplus collateral would be returned. Mrs. Turner then turned over to them for examination all the notes and securities which the bank had in its vault. Later in the day J. R. Dominick, president of the Kansas City bank, came to Chautauqua. J. M. Vandeventer was president of the Chautauqua bank, but was not active in its management. He lived on a farm and came to the bank once or twice a week. On the afternoon of Monday, January 26, Alexander sent for him, and when he arrived the parties went to the bank and examined the securities which had been selected. About that time a letter arrived from Turner, addressed to Mr. Vandeventer, containing a statement that some of the notes held by the Kansas City bank and other banks as collateral were forged by him, but that the money obtained thereby had all been used for the benefit of the bank, and not for himself. While the officers of the Kansas City bank were there they learned from Mrs. Turner that the bank had only about $ 30 in currency on hand. It was apparent that Turner had absconded, and that the bank was insolvent. Under these circumstances, the president of the Chautauqua bank, at the request of the officers of the Kansas City bank, turned over and indorsed to the latter notes and other evidences of debt, the face value of which was $ 38,000, and which constituted substantially all the assets and securities of the bank. At the same time the Kansas City bank turned back the former securities held by it. In explanation of the action of the Kansas City bank in insisting upon such a large amount of collateral security, it is said that by reason of the confession of cashier Turner the Kansas City bank was unable to ascertain at that time how much of the collateral could be depended upon as genuine. The Kansas City bank immediately placed the collateral in the hands of the First National Bank of Sedan, with instructions that when the $ 8000 had been collected the remaining securities were to be turned back to the Chautauqua bank. After Mr. Dominick left Sedan he stopped at Topeka and informed the bank commissioner of the transaction.

The jury by its verdict found for the plaintiff, and found that the value of the collateral still in the hands of defendant was $ 6694.91. The judgment rendered upon the verdict was for the return of the securities and moneys collected, or, in lieu of such return, a money judgment for their value.

Plaintiff bases its right to recover largely upon the provision of the banking law, which reads:

"No bank, banker, or bank officer shall give preference to any depositor or creditor by pledging the assets of the bank as collateral security, . . . provided, that any bank may borrow money for temporary purposes not to exceed in amount fifty per cent of its paid-up capital, and may pledge assets of the bank not exceeding twenty per cent. in excess of the amount borrowed, as collateral security therefor." (Laws 1911, ch. 65, § 1.)

The first question to determine is whether the transaction of January 26, 1915, is a preference prohibited by this statute. The defendant claims that in this respect the giving of the securities did not constitute a preference for the reason that they were turned over in pursuance of a promise made long prior thereto, and that the transaction was merely the consummation of an arrangement made at the time the notes were executed. It is said that by virtue of the terms of the previous agreement the Kansas City bank had possessed in equity and good conscience a lien which developed into actual possession when the...