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COURT

OF

APPEALS

OF HEW

YORK,

(254 N.Y. 218)

Decided. July 8 , 1930.

WILLIAM

A .

CAES

OH an d

Others,

a s

Trustees i n Bankruptcy of LEONARD

S .

ZARTMAN

a n d

ELLA

S .

ZAUOMAN,

Individual ly

a n d a s

Copartners,

Doing Business under t h e Firm

Name

of G. E .

ZARTMAN

&

COMPANY,

Appellants,

v .

FEDERAL RESERVE BAM of HEW YORE,

Respondent.

APPEAL from

a

judgment

of the

Appellate Division

i n t h e

four th

judicial department reversing a judgment o f the Trial Term

entered on a ve rd ic t of a ju ry i n favor o f th e p l a i n t i f f s and

dismissing

th e

complaint.

ARTHUR E . SUTHERLAND f o r appel lants .

COLIN McLENNAN f o r respondent.

CARDOZO,

Ch. J .

Trustees

i n

"bankruptcy

a r e

seeking

to

recapture moneys collected

by the defendant, a Federal Reserve bank, with notice that a preference

among creditors might

he an

e f f e c t

o f the

co l l ec t ion .

r E . Zartman & Company were engaged f o r many years i n t h e

business

o f

private bankers

a t

Waterloo,

New

York.

On May 16 an d 17 , 1927 ,

there came into t h e possession o f t h e defendant, t h e Federal Reserve Bank

i n t h e Second Fede ral Reserve Di st r i ct , 157 checks drawn on the Zartman

bank

f o r

sums amounting

i n t h e

aggregate

to

$15 ,271.56. These checks ,

drawn by Zartman depositors i n favor of various payees, h a d been indorsed

by the

payees

t o

banks, thir ty- seve n

i n

number, members

of t he

Federal

Reserve banking system,

and by

these indorsed

a nd

t ransmit ted

to the

defendant. The indorsements by the member banks show diversities o f

form, some being simply

to the

order

o f the

Federal Reserve Bank

of New

York, some

to the

order

of any

bank, banker

o r

trust company, some

to the

order of any bank o r banker, a n d some to the order of any Federal Reserve

bank. Accompanying

t h e

checks, when re ce iv ed

by the

defendant, were

l e t t e r s of remit tance . I n these t h e member banks gave notice to the

defendant that th e checks were inclosed f o r c r e d i t , " o r , more commonly,

f o r

" c o l l e c t i o n

a n d

c r e d i t ,

n

"co l l ec t ion

a n d

r e t u rn , "

o r

"co l l ec t ion

a nd

remit tance ." The defendant pursuant t o this mandate caused t h e checks t o

be presented f o r payment t o t h e Zartman bank, t h e drawee named therein.

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106

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—2—

I n

response

t o

this demand,

i t

received

two

d r a f t s ,

o ne f o r

$8,699.25,

th e other f o r $6,572.37, drawn by the Zartman bank i n Waterloo upon the

American 3xchange Irving Trust Company

of New

York. These d r a f t s ,

r e -

ceived

by t he

defendant

on May 18 and 19,

were presorted

to the

t rus t

conpany

f o r

payment

on May 20 and

again

on May 2 1 . On

each presentation

payment w as r e fused on t he ground that t h e d r a f t s h a d been drawn b y

Zartman ag ai ns t un co ll ec te d fun ds. Thereupon,

on May 23 , th e

defend-

ant's manager went

t o

Waterloo

an d

made demand upon Zartman that

the

d r a f t s

be

pa id

i n

ca sh . There

i s no

occasion

to

r e c i t e

th e

conversa-

t i on t h a t ensued. Enough f o r present purposes that what was said might

reasonably

be

found

by t he

t r i o r s

of the

f a c t s

t o

have been notice

to

t h e manager that Zartman was insolvent . Af te r a delay of a few hours

there

was

pa id

t o t h e

defendant

i n

cash

th e

sura

of

$10,363.93.

The

fol lowing day, May 24 , th e doors o f t he Zartman bank were closed f o r

business ,

a n d

have never been reopened.

A

p e t i t i o n

i n

bankruptcy,

f i l e d on June 27, was followed by an ad judica t ion of bankruptcy a nd t he

appointment

of

t r u s t e e s .

The

t r us t ee s

a r e

suing

to

recover

t h e

cash

pa id

t o t he

defendant

on May 23 a s a

voidable preference under

t he

provis ions o f t he Federal s ta tute .

To turn back a t this point to s t a t e t h e defendant ' s use of

th e

proceeds

of

co ll ec ti on s. Uach

of the

member banks

h a d a n

account

with th e defendant, a n account exacted by the statute (Federal Reserve

A ct , 38 U. S .

S t a t .

pp. 251, 270, § 19) as one of the

inc idents

of

membership. These acc oun ts were cr edi t ed on May 19 and 20 with the

amount

of the

Zartman drafts,

i . e . , t he

drafts drawn

on the

t rust

company, which were supposed, when received

by the

defendant,

to be

equivalent

t o

cash.

As

soon

a s

notice came that these drafts

h a d

been

dishonored,

t h e

entry

was

rever sed. Later,

on May 31 , th e

c redi t

was

r e - e s t ab l i shed t o t h e extent of $10,363.93, th e cash payment then i n

hand, each

of th e

thi r ty-seven banks being al lot ted

i t s

appropriate

share. Before t h e bankruptcy pet i t ion, th e banks h a d withdrawn from

their deposit accounts

i n t h e

usual course

of

business moneys equal

to

t h e balances i n thei r favor a t t h e date of the contested credits, though

they

h a d

also made

new

deposits which kept

t h e

daily balances

a t a

level

nearly uniform.

I f t he

first payments

out of t he

accounts

be

appropri -

ated to the f i r s t r e c e i p t s , a l l moneys collected from th e bankrupts ha d

been remitted

by t he

defendant

to the

thirty-seven member banks,

i t s

correspondents

and

deposi tors .

The

t r i a l j udge l e f t

i t t o t he

jury

to say

whether

th e

co l l ec -

t ions h a d been made by the defendant a s agent o r a s owner. The jury

found

f o r t h e

p l a in t i f f , t hus holding

by

the i r verd i c t tha t

t h e

co l lec t ion

was as owner. The Appellate Division held a s a matter of law tha t the

co l l ec t i on

was as

agent, basing

i t s

holding

i n

large degree upon

a n

agreement y e t t o be considered between t h e defendant a n d i t s members.

The

collection having been made

a s

agent,

t h e

conclusion

was

thought

t o

follow that t h e agent was not l iable s ince i t h a d se t t l ed wi th i t s p r i n c i -

pals before

t h e

r i g h t

o f

reclamation

h a d

been perfected

b y t h e

bankruptcy.

We

think

t h e

defendant

was an

agent

a nd no t a n

owner

i n i t s

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r e c e i p t o f t h e Zartman drafts a n d t h e su bs t i tu te d moneys. How th e 15 7

checks were indorsed

by the

payees when deposited with

t h e

member banks,

t h e record does n o t t e l l u s . T he problem to be solved, however, i s :

no t one a s t o t h e re la t ion be tween t h e member banks r n d the i r depos i to rs .

I t i s a

problem

a s t o t h e

relation between those banks

a n d t h e

defendant .

We

assume t h a t

t h e

form

o f t h e

indorsements,

i f n o t

q u a l i f i e d

by

ag ree -

ment, would have pas se d t o t h e defendant such t i t le , i f a n y , a s belonged

t o t h e i nd or se rs (F eder al Reserve Bank v . Malloy, 2 64 U. S . 1 60 , 16 4 ; City

of

Douglas

v .

Federal Reserve Bank,

27 1 IT. S . 48 9;

2:editable Trust

Co. v .

Rochling, 275 U. S . 248 ; Heinr ich v . F i r s t M a t . Ban :," 219 N. Y. 1 ) . An

agreement, however, i s i n ex is tence , t h e terms thereof proscr ibed b y

regula t ions adopted

b y t h e

Feder al Reserve Board under au th or it y co nfe r-

r e d b y t h e p r o v i s i o n s of t h e s t a t u t e . We must loo k t o this agreement t o

discover t h e re la t ion between t h e defendant a n d i t s members in the

process of c o l l e c t i o n .

By the Federal Reserve Ac t , a s f i r s t e n a c t e d in 1913, a . reserve

bank w as au tho r i zed t o collect only those checks which were drawn on

member banks a n d which were deposited b y a member bank o r another reserve

bank

o r t h e

United States (Farmers Bank

v .

Federal Reserve Bank,

262 If.- S .

6 4 9 , 6 5 4 ) . Even then , however, t h e r e g u l a t i o n s of t he Board provided ̂ I n

handling i tems f o r member banks, a Federal Reserve Bank will a c t a s agent

only" (Circular

No. 1 of 1916,

Fe de ra l Reserv e Board Report

of 1916, p .-

1 5 3 , note; Federal Reserve Bulletin, May, 1916 , p p . 259 , 26 0) . The

s t a t u t e w as amended i n September, 1916 ( § 13 ) (39 S t a t . 7 52 ) , so a s t o

author ize

a

reserve bank

to

rece ive

f o r

co l lec t ion f rom

an y

member checks

drawn o n non-member banks located i n t h e d i s t r i c t . The Board renewed i t s

order that

t h e

r e l a t i on shou ld

be one of

agency (Regulation

J ,

subd»

7 ,

Federal Reserve Board, Report

o f 1 9 1 6 , p . 1 7 1 ) . I n 1 9 1 7 t h e

s t a t u t e

was

again amended, this time b y a provi s ion tha t " s o le l y f o r t h e purposes of

exchange

or of

c o l l e c t i o n , "

a

reserve bank

may

receive f rom

a

non-member

bank o r t r u s t company checks payab le upon pr es en ta ti on , upon co nd it io n

that such non-member bank o r t r u s t company mai nt ain a n adequate balance

with

t h e

reserve bank

of i t s

d i s t r i c t

(Act of

June

21 , 191 7, ch , 32, § 4;

4 0 S t a t . 2 3 2 , 2 3 4 ; c f . 2 6 2 U . S . a t p . 6 5 5 ) . Col lec tio ns were thus p e r -

missible both f o r members a n d f o r non-members. •

I n t h e

s e t t i n g

of

t h i s s t a tu t e , Regu la t i on

J

( s e r i e s

of 1924)

was

adopted

b y t h e

Board,

and i s now to be

cons t rued .

I t

r e c i t e s

( i n

terms

s u b s t a n t i a l l y t h e same a s those of ea r l i e r r egu l a t i ons ) t ha t t h e Board,

" des i r i ng

t o

a f fo rd both

t o t h e

pub l i c

a n d t o t h e

various banks

of the

country a d i r ec t , exped i t i ous a n d economical system of check co l l ec t io n and

se t t l ement of ba lances , h a s arranged to have each Federal reserve bank

exe rc i s e

t h e

func t ions

o f a

c l ea r i ng house

a n d

co l l ec t chocks

f o r

such

of

i t s

member banks

a s

d e s i r e

t o

av a il themselves

of i t s

p r i v i l e g e s , "

t o

which i s added a r e c i t a l t h a t l i k e p r i v i l e g e s w i l l be a f f o r d e d t o n o n -

jnembor banks

a n d

t rust companies qual i fying

i n

cer ta in ways.

I t

then

proceeds to a s ta tement of t he terms a n d condi t ions o n which business may

b e dene. The Feder al Reserve Board hereby aut ho ri ze s t h e Federal reserve

^b&riks

t o

handle such checks subject

t o t h e

following terms

a n d

condi t ions;

a n d

each member

a n d

nonmember clearing bank which sends chocks

to any

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Fede ral re se rv e bank: sh al l

by

such action

b e

deemed

( a ) t o

au thor ize

t h e Federal reserve "banks t o handle such checks subject t o t h e following

terms

a n d

condi t ions ,

( b ) to

warrant

i t s own

a u t h o r i t y

t o

give

t h e F e d -

er al r ese rve banks such au th or it y, a nd ( c ) to agree to indemnify any

federa l reserve bank

f o r a n y

loss resu l t ing f rom

th e

f a i l u r e

o f

such

sending bank t o have such a u t h o r i t y . " Among th e terms a n d condit ions

thus proscr ibed a r e these : A Federal r es er ve bank wi ll a c t only a s

agent

o f the

bank from which

i t

receives such checks." A Federal

r e -

servo bank may pr es e nt such checks f o r payment o r send such chocks f o r

c o l l e c t i o n d i r e c t

t o t h e

bank

on

which they

a r e

drawn,"

o r

forward them

t o another agent ." A Fed era l res erv e bank may * * * a t- i t s option,

e i t h e r d i r e c t l y

o r

through

a n

agent , accept

* * *

frank drafts

* * *

c a s

k»" without being l iable f o r a n y loss thereby resu l t ing .

The

amount

of any

check

f o r

which payment

i n

a c t u a l l y

a n d

f i n a l l y

co l lec ted funds i s n o t received shal l b e charged back t o t h e forwarding

bank, regardless

of

whether

o r n o t t h e

check i t se l f

can be

re turned ."

Finally each Federal He se rve bank may promulgate i t s o w n r egu la t ions ,

n o t

inconsis ten t wi th

l a w o r

with

t h e

r egu la t ions o f

t h e

Board,

and

such regulat ions shal l be binding upon member a n d n o n m e m b e r banks a -

v a i l i n g o f i t s p r i v i l e g e s .

Pursuant

t o t h e

authori ty thus conferred,

t h e

defendant made

i t s o w n

r egu la t ions ( c i r c u la r

Ho . 728 ,

Ju ly

1 ,

1926) , reaf f i rming

the

regula t ions adopted by the Board a n d supplementing them by o t h e r s . One

of the

supplemental rules prescribes

t h e

period that shal l elapse before

a n y c r e d i t s h a l l b e al lowed, e i t her p rov is ional o r f i n a l , f o r checks

sent

i n b y

members. Cr ed it

may be

given

a t

once

i n

what

i s

known

as a

deferred, account, n o t sub jec t to be drawn o n , b u t t h e r e is to be no

c r e d i t

i n t h e

reserve account un t i l

t h e

appropriate t ime indicated

on

e current t ime schedule h a s el ap se d, " though even upon en tr y i n that

account , "cred i t

a n d

a v a i l a b i l i t y

a r e i n a l l

ins tances sub ject

to * * *

ac tua l r ece ip t o f payment." The t ime schedule thus referred t o i s based

upon th e average ma ili ng time re qui re d f o r i tems t o reach t h e paying bank,

p lu s

t h e

t ime required

f o r t h e

paying bank

to

remit

t o t h e

defendant .

Another supplemental rule gives notice t o member banks a n d others that

defendant will handlo chocks

a s

cash items only

i n

accordance with uniform

i n s t r u c t i o n t h e r e i n s e t f o r t h , a n d t h a t a n y cont rary o r spec ia l i n s t ruc -

tions noted

on

c a s h l e t t e r s

o r

a t t ached

to

checks will

b e

'd isregarded."

Another yule prescribes t h e form of the indorsement to be adhered to by t r ans -

mitting banks, whether members

o r

non-members.

The

indorsement must

b e

" w i t h o u t r e s t r i c t i o n t o t h e order of the Federal Reserve Bank of New York

or to the

order

of any

bank, banker,

o r

t r u s t company wi th

a l l

p r i o r

i n -

dorsements guara ntee d.." This form i s necessary, a s h a s been stated, whether

t h e

checks t ransmit ted

t o t h e

defendant

a r e

from members

o r

non-members

though t h e s t a t u t e i s e x p l i c i t t o t h e e f f ec t t ha t t here sha l l be no power

i n a

reserve bank

t o

handle checks

f o r

non-members except "solely

f o r t h e

purposes

of

exchange

or of

co ll ec ti on " (Fed eral Reserve Bank

A ct , 6 13 ,

amendment^of 191 7, § 4) . P la in l y , then, th e form o f th e indorsement was

n o t

conceived

of as

involv ing

a

departure from

t h e

mandate

o f th e

s ta tu te*

P la in ly ,

t o o , i t w a s n o t

conceived

of as

inconsistent with t5je regulat ions

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an d t h e circular whereby checks received from any "bank a r e to be handled

by the reserve "banks i n t h e capaci ty o f agents only. The same circular

an d

regula t ions tha t prescr ibe

th e

form

of th e

indorsement establish

the

p r a c t i c e

an d t h e

agreement

to

receive

th e

checks

a s

agent ,

a n d

give

not ice

t o

tra ns mit t in g banks tha t

t h e

terms thus established shall

be

exclusive of any o thers .

Th e inference of ownership that follows i n most cases from

a n unqualified indorsement i s one dependent upon intention. I t may be

overborne

by

agreement

to the

contrary, whether

th e

evidence

of

agree-

ment

be

d i r e c t

o r

circumstantial (Federal Reserve Bank

v .

Malloy, supra,

a t p . 1 6 4 ) .

Direct

a s

well

a s

c i rcumstant ia l

i s t h e

evidence before

u s .

The r egu l a t i ons of the Board, reinforced by the defendant

4

s c i rcular ,

an d assented to by the transmitt ing banks, a r e equivalent to an express

agreement that

a s

between

t h e

defendant

and the

other banks

t h e

r e l a t i on

engendered

by the

r ece ip t

of

un col lect ed paper sha l l

be an

agency

and

nothing more.

The

agreement

i s

confirmed

b y t h e

underlying purposes

and

p o l i c i e s of the Federal reserve system" ( p e r CROUCH, J . , i n t h e court

be-low), by the p lace of the reserve banks in t h e d i s t r i b u t i o n of banking

func t i ons a s conceived a n d developed by the framers of t he st at u te . There

i s no token of a purpose to burden clearance a n d co l lec t ion wi th t h e r e -

s p o n s i b i l i t i e s

of

ownership.

The

argument

i s

made that

a

d i s t i n c t i o n

i s to be

drawn between

co l l ec t i on

f o r t h e

member banks

a n d

co l l ec t i on

f o r t h e u s e o f

o thers .

The regula t ions an d t h e c i r c u l a r do no t express such a d i s t i n c t i o n ; i f

i t i s t o b e made, i t must b e i n t e rpo l a t ed by a process of cons t ruc t ion .

We are told that what i s sa id i n t h e ru l e s as to the ex i s tence of an agency

h a d i t s o r i g i n in an at tempted adaptat ion of the s t r u c t u r e of the system

t o t h e

n e c e s s i t i e s

of the new

"business made possible

in 1917

through

th e

amendment

of t he

s t a t u t e . Ti l l then, co l lec t ions

b y a

reserve bank were

always

f o r t h e

account

of

member banks,

f o r

whom

i t was

a l so

a t

l i be r t y

t o

receive checks

o r

moneys

f o r

dep osi t . Since then, the re

may

a l so

b e

co l l ec t i ons

f o r t h e

convenience

of

non-members.

To

these

an d t o

these

only,

we a r e

t o ld ,

t h e

r egu l a t i on

an d t h e

circular were intended

to

apply.

The h i s t o ry , s t a t u to ry and. adminis t ra t ive , of the Federal Reserve system

teaches a di f f er en t less on. There i s no connection, temporal o r causal ,

between th e genesis of the rule that th e r e l a t i on sha l l be one of agency

an d th e

enlargement

of the

f i e l d

of

business following

t h e

amendment

of

t h e

st a t u t e . Long "before the re

was

power

t o

make clearances

o r

co l lec t ions

f o r

banks

n o t

members

of the

system, there

was

a l ready

a

statement

in t h e

rules that i n t h e handl ing of checks and drafts when forwarded by members.,

t h e reserve banks were to be deemed t o a c t i n t h e capaci ty of agents only.

Amendments of the ru l e s have r e s t r a ined r e spons ib i l i t y s t i l l f a r t he r by

adding

a

provis ion tha t

th e

agency shall

b e o n e f o r t h e

forwarding bank,

an d n o t f o r any

other, thereby excluding

a n

at tempt

t o

convert

i t

in to

an

agency

f o r t h e

payees

of the

checks,

th e

or iginal deposi tors (Federal

R e-

serve Bank

v .

Malloy, supra; City

of

Douglas

v .

Fede ral Reserve Bank, s up ra ).

From t h e beginning, however, th e r e l a t i o n h a s been c l a s s i f i ed a s agency,

n o t ownership. A c l a s s i f i c a t i o n so e x p l i c i t may no t be he ld to have been

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110

neu t ra l i zed by the terms of the "cash letters,'* vzith their varying decla-

ra t ions that

t h e

checks

a r e

inclosed

f o r

" c r e d i t , "

o r f o r

"co l lec t ion

a n d

c r e d i t , "

o r f o r

"co l l ec t ion

an d

remittance"

( c f .

Bank

of

America

v. Way d e l l , 187 N. Y. 115 , 12 0) . By express provision of the defendant

1

s

c i r c u l a r

th e

le t ters must

be

disregarded

i f

inc ons ist ent v;ith

th e

uniform

prac t i ce es t ab l i shed b y t h e c i r cu la r and by the regula t ions of the

Board behind i t . There an d novzhere e l se , l e a s t o f a l l i n a perfunctory

notice

of

remittance embodied

i n a

printed form,

th e

agreement governing

t h e

r e l a t i o n

ha s i t s

f i n a l

an d

complete expression.

I f t h e

defendant

was an

agent

i n t h e

r ece ip t

of the

Zartman

d r a f t s an d t h e substituted moneys, t h e ques-tion must s t i l l be met whether

i t s l i a b i l i t y w as enlarged b y an y o f i t s a c t s t h e r e a f t e r . We must say

whether

t h e

agent became subject

to t h e

l i a b i l i t y

of an

owner when

ins t ead

o f

r emi t t i ng

t h e

proceeds

of

co l l ec t ion d i r ec t ly

t o i t s

p r i n c i -

pa l s , i t p u t t h e proceeds to thei r cred i t i n a n ordinary deposit account,

thereby turning

th e

re la t ion f rom

one of

agency into

one of

c r e d i t o r

and

debtor .

I n

e f f e c t ,

th e

s i t u a t i o n

was

then

th e

same

as i f t h e

defendant,

receiv ing

t h e

money

i n t h e

capaci ty

of

agent,

h a d

handed

i t

over

to t h e

p r i n c i p a l s , a n d h a d received i t back a t once to be r e t a ined a s a deposit

(Commercial Bank of Penn. v . Armstrong, 14 8 U. S. 50, 58, 5 9; Marine Bank

v»

Fulton Bank,

3

Wall. ( U.S. )

2 5 2 :

Evansville Bank

v .

German American

Bank, 1 55 U. S. 5 56; National B. & D. Bank v . Hubbell, 117 N. Y. 384, 396 ;

Langley v . Warner, 3 N. Y# 32 7, 3 2 9 ). We think the new r e l a t i o n d id no t

take from

t h e

defendant

t h e

p ro tec t ion

of the

r ul e th at money pa id

to an

agent,

and

lawful ly accepted,

may no t

t h e r e a f t e r

b e

reclaimed

by one who

h a s made t h e payment with notice of the agency, i f before t h e attempted

reclamation

th e

agent

i n

good faith

h a s

se t t le d wi th

t h e

pr incipal

(National Park Bank

v .

Seaboard Bank,

114 IT. Y. 28;

National City Bank

v .

Westcott ,

118 N. Ye 468, 47 3, 474 ;

Hooper

v .

Robinson,

98 U. S. 528 ;

Buller

v .

Harrison,

1

Cowper,

5 6 5 ) .

True, indee d,

i t i s

tha t

th e

settlement

s u f f i c i e n t t o c al l th i s pre ce pt into play must be ac tua l and no t construc-

t ive (Buller v . Harrison, supra: Mowatt v . McLelan, 1 Wend. 173, 178; La

Farge

v .

Knee la nd .

7 Cow . 4 5 6 , 4 6 0 ) . I f a l l

t h a t

t h e

agent

h a s

done

i s

t o agree with t h e pr in cipa l that th e fund , s t i l l i n t ac t , sha l l b e held

t h e r e a f t e r a s a debtor, h e i s n o t sub jected to any l o s s i f d i r ec t ed to

make res t i tu t ion

o u t o f t h e

moneys thus retained

( c f . La Far go v . Kne

elan d

a n d

Mowatt

v .

McLelan, supra).

On th e

other hand, when once

th e

fund

h a s been depleted b y payment of the debt, th e situation becomes th e same

a s i f t h e

payment

t o t h e

p r i n c i p a l

h a d

been made

a t t h e

beginning.

The

agent

i s no

b e t t e r ,

o f f b y

reason

of the new

r e l a t i o n ,

b u t

even

if no

b e t t e r ,

h e i s

equal ly

no

worse.

As to this aspect of the case, th e ru l ing i n National Park Bank

v .

Seaboard Bank (supra)

i s a

precedent

so

nearly ident ical that

i t

must

b e

accepted

a s

de ci si ve . There

th e

Seaboard Bank received

a

check

f o r

c o l l e c t i o n a s agent f o r t h e Eldred Bank an d upon receipt o f t h e proceeds

gave notice

t o i t s

p r i n c i p a l

i n

accordance with

a

course

of

dealing that

t h e

proceeds

h a d

been credi ted

i n a n

account current between them

on

which

drafts from time t o time were drawn as on an ordinary account between a

bank

an d a

dep osi tor . There

can be no

question that

t h e

collecting bank,

»

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af ter

t h e

giving o f this notice, was at l iberty to use the proceeds with

a l l

th e freedom

of an

owner, discharged

of any

duty

to

remit

i n

specie

to th e principal ( c f . Commercial Bank of Penn. v . Armstrong, supra;

Marine Bank v . Fulton Bank, supra). Even so, the ruling was that i t

could no longer be held to res t i tu t ion at the su i t of the drawee bank

a f t e r th e drafts on the account current had exhausted the credit balance

exist ing at the time of the col l ec t ion . To determine whether t h e b a l -

ance had been used up, the court applied th e rule i n Clayton's Case

( 1

Meriv.

572, 604, 608)

whereby

the

successive payments

and

credits

are to be

appropriated

in

discharge

of the

items

o f

debt antecedently

due in the order o f time i n which they stand in the account, th e f i r s t

payments o u t extinguishing the first payments i n . There a r e many other

cases, State

and

Federal, enfor cing

a

like rule (Allon

v .

Culver,

3

Denio, 284, 293; Thompson v . S t . Nicholas Hat. Bank, 1 13 N. Y. 32 5, 333;

Delaware Dredging Co. v. Tucker Co ., 25 Fed. Rep. (2d ) 44, 46; Cory Bros.

& Co. v . Ownors of S. S . Mecca, 1897 A. C. 28 6, 288; Deeloy v . Lloyd's

Bank,

lt d . , 1912 A. C. 756 , 783;

Matter

o f

Stenning, (1895)

2 Ch. 433) .

We have no thought t o suggest that this or any other formula as to the

application o f payments to the items of an account i s o f such inflexible

va l id i ty as to admit of no excep tio ns. Whatever rule i s framed w i l l be

subordinated

to the

broader pr inc ip le that

an

application, usually

ap -

propriate, may be varied by the court when variance i s necessary to promote

th e ends of justice (Korbly v . Springfield Inst, f o r Savings, 245 U. S. 330 ;

Lichtenstein

v .

Grossman Constr. Corp.,-

248 N. Y. 390 ;

Matter

o f

Hal let t ' s

Estate. 13 Ch. D iv . 696; Cunningham v.• Brown, 365 U> S. 1 , 12, 1 3 ) . Hone

th e l e s s , th e formula i s expressive of a rule that must prevail in the

absence o f persuasive reasons f o r qual i f icat ion or exception. We cannot

f a i r l y say that just ice wil l be thwarted i f t h e rule i s followed here,

The principals ar e solvent banks, and the trustees a r e a t l iberty t o pursue

th e moneys i n their hands (Matter of Hil l Co. . 130 Fed . Rep. 315 , 31 8) .

At l e a s t , i f there is any obst acle , there i s nothing in the record to te l l

u s

what

i t i s . No

obvious requirement

o f

pol icy

or

justice exacts

the

suspension or abandonment of an established rule of law to the end that

collection from an agent may take th e place of an exi s t ing and suf f i c i en t

remedy by suit against th e principals .

Passing, then, from

th e

question

of the

application

o f

payments,

we come back to the inquiry whether th o immunity of the agent i s l o s t or

impaired when the proceeds of the collec t ion, instead o f being remitted to

the

principal

a t

once,

a r e

retained

a s a

deposit

and

remitted later

on.

What was held on that subject in t h e case of the Seaboard Bank has not

been modified by anything decided si nc e that time. National B. & D. Bank

v..H ubbel l (su pra), w ith some ana logie s on the surface, i s essent ial ly

dissimilar.

The

f a c t s

in t h e

Hubbell case were th es e: Checks forwarded

f o r c o l l e c t i o n had been placed when collected to the credit o f a deposit

account. Upon th e fa i lure of the bank, the depositor made claim to the

proceeds

in t h e

hands

o f a

receiver

a s i f

subject

to a

trust, though

the

entry

in t h e

deposit account

had

been made with

i t s

assent.

Tho

court

held that t h e claim h ad been turned into a debt, and that the depositor

must come in and share with the general creditors ( c f . Latzko v . Equitable

Trust Co ., 275 U. S. 2 5 4 ) . The point to be determined was the l i a b i l i t y of

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a n

agent

t o a

p r i n c i p a l ,

of a

bank;

t o i t s

correspondent , af ter

the

terminat ion of the agency. Ho question was involved, a s t o i t s l i a b i l i t y

to a th i rd person , th e drawee of the checks, seeking r e st i tu t i on a f t e r

th e

agent

an d t h e

p r inc ipa l

h a d

made

a

settlement between themselves.

We

conclude,

as i n t h e

Seaboard case, that

th e

defendant

d id

n o t enlarge i t s l i a b i l i t y to the r ep resen ta t ives o f t h e bankrupts

when, af ter col lect ion

w as

complete,

i t

transformed

i t s

r e l a t i o n

to

th e forwarders from agency t o debt, le ga l concepts wi ll not be

s t r a ined

t o

r e l i e v e

an

agent

of

l i a b i l i t y

by

force

of a

settlement that

i s

merely formal

o r

const ruct ive ,

b u t b y t h e

same token they will

not be

s t ra ined agains t him to charge him w it h l i a b i l i t y . I n a formal o r co n -

struct ive sense,

th e

defendant, acting

a s

agent , s et t l ed with

i t s

principals when by t he e n t r i e s i n i t s books i n accordance with th e

course

of

deal ing

i t

gave

u p t h e

moneys received

b y i t a s

agent

and

took thorn back

a s

de bt or . Such

a

set t lement wil l

n o t

h a l t

th e

pursu i t

and re l ievo f rom l i a b i l i t y while th e fund i s s t i l l i n t a c t . I t w i l l not

open

t h e

door

to

enable

t h e

pu r su i t

to be

continued when

t h e

fund

h as

been disbursed.

,7e have s ai d th at th e money was lawful ly co l lec ted by the

agent

and was

paid

by the

drawee with notice

of the

agency. Lawful

the

co l l ec t ion w as a t t h e moment of the making, though th e agent i n c o l l e c t -

i n g h a d cause to believe that th e e f f e c t of the payment would be a p r e f e r -

ence among creditors.

The

statute does

n o t s ay

that

one who

accepts

a

payment from a debtor believed to be insolvent i s g u i l t y of a fraud

(Van

Ide r s t ine

v .

National Discount

C o. , 2 27 U. S. 575, 5 82;

Wilson

v .

Mitchell Woodbury Co . , 214 Mass. 514, 519; Grandison v . Robertson, 231

Fed . Hep . 785 , 78 8) . A payment so made i s n o t even voidable th er ea ft er

unless

a

p e t i t i o n

i n

bankruptcy follows within four months.

I f

that

interval elapses with bankruptcy postponed, th e preference, however

dubious

i n i t s

making,

i s

proof against assaul t ,

'we may n o t

hold

i n

such conditions that

t h e

defendant

by the

mere acceptance

of the

money

was g u i l t y of a wrong, and so chargeable wi th l iab i l i ty i f i t d id n o t keep

th e

fu nd i n t a c t (Mechem

on

Agency,

v o l . 1 , § § 1435 ,

1436). Before re tu rn

became a duty, t h e money was paid o u t . I f there was need of notice t o

th e

drawee that

t h e

drafts were col lected

by the

defendant

a s

agent

and

not as

owner (Mechem, supra,

§ 1439;

Holt

v .

Ross,

54 N, Y. 472 ;

National

City Bank

v .

T/estcott ,

118 JT. Y. 468 , 47 3;

Canal Bank

v .

Bank

of

Albany,

1

Hi l l ,

2 8 7 ; c f . ,

however, Williston,

on

Contracts ,

v o l . 3 , § 1 5 9 5,

note),

we think t h e no t ice w as imparted by the regula t ions an d t h e c i r cu la r s ,

publ ic

an d

official documents, which, like

th e

l i m i t a t i o n s

of a

corporate

charter, were

to be

heeded

by the

world

a t

l a r g e .

But

no t ice

was

unnecessary, i f t h e defendant was not a c red i to r , f o r t h e r i g h t to avoid

th e

p re fe rence

i s t h e

creature

of the

s t a t u t e ,

and the

f a c t ,

not the

supposi t ion o r fancy o f t h e debtor, must tell u s when t h e r igh t ex i s t s .

17e pas s t hen to t h e f i n a l question, whether wit hin th e meaning

of th e Ac t of

Congress

a

bank collecting

a

d r a f t

a s

agent,

an d n o t a s

owner

(Matter

of

H i l l

C o . ,

supra) ,

i s a

credi tor subject

to a

duty

to

make

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r e s t i t u t i o n

of a

preference, though there

h a s

"been remittance

t o i t s

pr inc ipa l p r io r t o t h e 'bankruptcy. There can he no answer without

r e c a l l i n g

t h e

prov is ions

of the

s t a tu t e .

Bankruptcy

A c t ,

sect ion

6 0 - b

(Jiason's

U. S«

Code, t i t le

11,

ch . 6 , § 96)

provides:

I f a

"bankrupt shall

* * *

have made

a

t r ans fe r

of any of h i s proper ty , a n d i f , a t t h e time of the t r a n s f e r * * * an d

* * *

within four months before

th e

f i l i n g

of the

p e t i t i o n

i n

bank-

ruptcy * * * , th e bankrupt b e inso lven t , and * * * the t ransfer then

operate a s a p re fe rence , an d t h e person receiving i t o r to be benef i ted

thereby,

o r h i s

agent ac ti ng ther ei n, sh al l then have reas onabl e cause

to bel ieve that t h e enforcement o f such * * * t ransfer would ef fect a

preference, i t s h a l l b e voidable b y t h e t r u s t e e and he may recover the

proper ty

o r i t s

val ue from such pe rs on ."

One who

accep ts

a

preference

n o t f o r h i s o wn

account

b a t a s

agent f o r a p r i n c i p a l i s n o t t h e person receiving i t o r t o b e benef i ted

thereby." To be sure, th e p r inc ipa l i s chargeable with notice imparted

t o t h e

agent

as t o t h e

f inancia l condi t ion

o f t h e

debtor

a n d t h e t e n -

dency of th e payment to e f f e c t a p re fe rence . To be sure, als o, the

agent

may be

sued direct ly

i f t h e

t i t l e

i s i n h i s

name

a n d t h e

subject

of the

t r a n s f e r i n t a c t

i n h i s

possession, ju st

a s

suit might

be

brought

i n l ike condit ions against any other trustee holding money o r other

proper ty

t h e

f r u i t s

of an

unlawful sale.

The on e who

r ece ives

a

p r e f e r -

ence, however, within t h e meaning of th e s t a t u t e , i s th e one who i s

p r e f e r r e d , and the one who i s p r e f e r r e d i s n o t t h e mere custodian o r

intermediary,

b u t t h e

cred i to r , p resen t

o r

cont ingent ,

who

receives

b y

v i r tue of the preference a n excessive share of the e s t a t e . The s t a tu t e

does

n o t

in tend ,

of

course, that

t h e

fo ra

of th e

t ransact ion shal l

be

permi t ted

t o

o b s c u r e r e a l i t i e s .

To

cons t i t u t e

a

preference,

i t i s n o t

necessary that t h e t r a n s f e r be made directly to t h e c r e d i t o r . I t may be

made

to

another

f o r h i s

be ne fi t" (na tio nal Bank

of

Newport

v .

national

Herkimer County Bank. 2 3 5 U . S . 1 7 8 , 1 8 4 ) . This wi ll happen, f o r example,

i f bankrupts make a t r a n s f e r of the i r a s se t s t o a c red i to r o f t h e i r own

c r e d i t o r ,

who i s

thus p re f e r r ed

to t h e

same extent

a s i f t h e

t ransfer

h a d

been made

to h im

d i r e c t l y

( 2 2 5 U . S . a t p . 1 8 4 ) .

There

h a s

been

no

attempt i n t h e decis ions t o catalogue forms of b e n e f i t an d methods of

evasion.

No

doubt

t h e

case supposed

i s

typ ical

of

o t h e r s .

One

thread

of

un i formi ty

may be

looked

f o r ,

none

th e

less, among

a l l

d i v e r s i t i e s

of

circumstance*• The person to be charged wi th l i a b i l i t y , i f h e h a s parted

before

t h e

bankruptcy with t i t l e

a n d

possession, must have been more than

a mere custodian, an intermediary o r conduit between t h e bankrupt and the

cred i to r . Di rec t ly

o r

i n d i r e c t l y

he

must have

h ad a

benef i c i a l i n t e res t

i n t h e preference to be avoided, th e thing to be reclaimed. One wi l l

f i nd a n a p po si t e i l l u s t r a t i o n o f t h e e f f e c t an d meaning of the s t a t u t e

i n t h e

holding

i n

Keystone Warehouse

Co. v . Bis

s e l l

( 2 0 3 Fed . Rep . 6 5 2 ) . •

The buyer o f f lour , in tending t o p r e f e r t h e s e l l e r , made payments to a

warehouseman who had no t ice of insolvency. The holding was that th e

warehouseman,

who had

r emi t t ed

th e

payments

t o t h e

s e l l e r ,

was no t

charge-

ab le the rea f t e r

a t t h e

s u i t

of the

t r u s t e e s .

A

possessory r igh t

o r

special

4

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property having

i t s

o r i g in

i n t h e

bailment

nay

have given

him

capacity

t o

maintain

a

su i t

f o r

flour wrongfully withdrawn,

b u t d i d n o t

turn

him

into

a

c redi tor rece iv ing d i rec t ly

o r

i n d i r e c t l y

t h e

b e n e f i t

of a

p r e f -

erenc e. Merc anti le Trust Co. v. Schlaf ly (299 Fed . Hep . 202) , much

r e l i e d on by the p l a i n t i f f s , i s no t a holding to t h e contrary, f o r there

th e defendant to be charged, a trustee under a mortgage, h a d t h e moneys

i n i t s

possess ion ,

th e

suit being brought before distribution among

th e

bondholders

( 2 9 9 Fed . Rep . a t p . 2 0 3 ) .

True, indeed,

i t i s

tha t

the

phraseology o f t h e s t a t u t e i s inexact an d ambiguous. Even so, a court

wi l l

be

caut ious

i n

imputing

to the

lawmakers

a

purpose

to

uproot

th e

s e t t l e d p r i n c i p l e s

of the

common

law as to th e

e f f e c t

of

payment

to an

agent when followed by a se t t l ement . A l l t h i s i s t h e more pl ai nl y t ru e

i n view o f t h e a n ti th es is cl ea rl y marked upon th e f ace of the enactment

between

t h e

r e c i p i e n t s

of

bene f i t , d i r ec t

o r

i n d i r e c t ,

who a r e t h e p e r -

sons to be sued, and the i r agents i n t h e business of the t r ans f e r ,

whose l i ab i l i t y ,

i f i t

e x i s t s ,

i s

secondary

a n d

i n c i d e n t a l

to t h e

l i a b i l i t y

of others .

We fi nd nothing in con sis ten t with these views i n Marine Trust

Co. v . Lauria (21 3 App. D iv. 64; a f f d . , 244 IT. Y. 577) and Matter of

Veler (249 Fe d . Rep . 63 3) . A bank t o which a check i s t r a n s f e r r e d by a

res t r ic t ive indorsement

f o r

col lect ion only

may

maintain

a n

ac t i on

on the

check

in i t s own

name because section

67 of t he

Negotiable Instruments

law (Cons. Laws, ch . 3 8 ) says that i t may (Marine Trust Co. v . Lauria,

supra; c f . Hays v . Ha.thorn. 74 N. Y. 486 ; Spencer v . Standard C. & M. Corp..

237 N. Y . 479) . Th is does n o t mean that i t i s owner fo r every purpose; i n -

deed by the very hypothesis i t i s n o t owner, b u t co ll ec to r. Whether i t

i s p r i v i l e g e d i n l ike circumstances t o maintain a p e t i t i o n i n bankruptcy

mast

b e

h e l d

to be

s t i l l u n c e r t a i n .

The

opinion

i n

Matter

of

Veler (supra)

deals with

a

case where there

w as

more than

a

mere agen cy.

The

assignee

h ad a

t i t l e a b s o l u t e

o n i t s

face, though

t h e

motive

of the

assignment

was

t o

f a c i l i t a t e c o ll e c t io n

f o r t h e

b e n e f i t

of

ano th er . Motive witho ut more

may be

i n s u f f i c i e n t

t o

derogate from t i t l e (Sheridan

v .

Mayor.

68 N. Y. 30;

Hays v. Ha thorn, supr a) . Bu t t h e r i g h t to su e , i f i t exists, does n o t mean

of necessi ty that t h e su i t o r i s rec iproca l ly subjec t t o a l i a b i l i t y to be

s u e d

(Keystone Warehouse 'Co. v . MsselT.' sugraT."We^think t h e mnsf

be

read

i n

conformity with common-law analogies

to

exempt

a n

agent

o r

custodian from

t h e

duty

to

account

f o r

proper ty

o r

money,

t h e

subject

of

a

preference ,

i f

oefore

t h e

coming

of

bankruptcy

h e h as

s e t t l e d v i t hh i s

p r inc ipa l .

The judgment should be aff i rmed vi th cos ts .

POUND,

CRA2I3

LEHMAN, K3LL0G-G, O'BRIEN

a n d

HUBBS,

J J. ,

concur.

Judgment affirmed.

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