[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] *Page 165
[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] *Page 166
[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] *Page 167
[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] *Page 168
[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] *Page 169 The St. Nicholas Bank claims the right to apply the securities and moneys theretofore deposited with it by the Madison Square Bank towards the reimbursement of its payments, or clearances, of the latter's checks on the morning of August 9th, 1893. With respect to that claim the proposition of the plaintiffs is twofold. They say that rule 25 of the clearing house did not require the Saint Nicholas Bank to clear the checks drawn on the Madison Square Bank, presented after it became aware of the insolvency of the latter, and that such insolvency terminated the relation of clearing house agent and rendered any payments made unauthorized; or, if the clearing house rule is susceptible of the interpretation that it required the Saint Nicholas Bank to honor checks drawn on the *Page 172 Madison Square Bank after its insolvency became known to it, the contract between the banks, in so far as it contemplated such payment and the use of the securities of the Madison Square Bank to secure the advances made by the Saint Nicholas Bank, was an illegal preference under the statute. The controversy must turn, in my opinion, upon the nature of the relation which existed between the two banks in question and the clearing house and upon what was the extent of the obligation entailed upon the St. Nicholas Bank, in engaging to receive and to clear checks drawn upon the Madison Square Bank, when presented through the clearing house. For the plaintiffs it is argued that, as between the Madison Square Bank and the St. Nicholas Bank, the relation, simply, of principal and agent was created and, therefore, upon the insolvency of the former becoming known, on the morning of the day when clearances of the previous day's checks were to be effected, that the latter bank was not entitled to pay checks drawn upon the former bank. But I think to view the relation as such is altogether incorrect and unwarranted by the facts. In a certain and limited sense the St. Nicholas Bank, of course, would act as an agent, in clearing and paying checks drawn upon the Madison Square Bank. That, however, was a mere feature of that larger contractual relation, into which the two banks had entered with the Clearing House Association, and which characterized all their dealings. The agreement of January, 1891, was one to which there were three parties; each of which was moved to enter into it by a legitimate consideration. The Madison Square Bank acquired the very substantial advantages, which the members of the Clearing House Association enjoyed, in the increased convenience, dispatch and safety of banking transactions. The St. Nicholas Bank acquired advantage, benefit and a protection by the deposit of collateral securities to the amount of $100,000 and of the cash, required to be made by the Madison Square Bank. The cash deposit was to be free of interest and maintained at a daily balance of $50,000. The members of the Clearing House Association, in extending to the Madison Square Bank the right to *Page 173 have its checks cleared and paid through one of its members, were assured that all checks presented would be paid up to, and including, the day following the giving of notice by the St. Nicholas Bank of the termination of the arrangement between itself and the Madison Square Bank. The learned referee very correctly defines the arrangement between these two banks and the clearing house as constituting a tripartite agreement upon ample consideration, for the mutual benefit of all the parties who entered into it. That agreement provided for the length of its duration; for the maintenance at all times of the stipulated security to protect the St. Nicholas Bank and bound that bank to receive and pay the checks drawn upon the Madison Square Bank as it would its own.
The St. Nicholas Bank could only agree and arrange to clear for the Madison Square Bank, in accordance with conditions imposed by the constitution and rules of the Clearing House Association; and an essential condition was that the arrangement could not be discontinued, nor should its liability cease, until after the completion of the exchanges of the morning next following the receipt of a notice of discontinuance. There was nothing in such a provision of the constitution of the clearing house, which was objectionable, legally speaking, or otherwise. It was perfectly competent for the banks to form themselves into this voluntary association and to agree that they should be governed by a constitution and by rules. When adopted, they expressed the contract by which each member was bound and which measured its rights, duties and liabilities. (Belton v. Hatch, 109 N.Y. 593. ) If not in conflict with rules of law, they must be awarded that effect which is always accorded to the deliberate engagements of parties. The provisions of section 25 of the constitution of the Clearing House Association were designed as a security and a protection for the members, in the event mentioned. When the Madison Square Bank made its arrangement with the St. Nicholas Bank and, also, made compliance with the terms of the demand of the clearing house circular, I think it is clear that a definite contractual relation was at once created between the three *Page 174 parties; whose provisions and relative engagements were effectually defined and controlled by the constitution and rules of the clearing house, in so far as they touched the proposed clearances of checks. The contract, which bound the members of this voluntary association of banks and regulated their duties, rights and liabilities, permitted the representation of an outside bank, through a member; provided that member assumed a liability, which should not cease, until the completion of clearances on the morning next after its notice of a discontinuance was given. That liability, so exactly provided for, is, however, sought to be limited to cases, where insolvency has not supervened, as to the non-member bank. If the relation here was strictly that of an agent acting for a principal the question might be a serious one; but even then much might be said in favor of the liability which the agent had, with the assent of the principal, assumed. That, however, was not the relation. The Madison Square Bank was a contracting party in an agreement, to which the other parties were the St. Nicholas Bank and the Clearing House Association, and it had accepted and had become bound by provisions in the latter's constitution and rules. That agreement was entered into at a time when it was perfectly competent to make it and its duration was fixed by section 25 of the constitution of the clearing house. As the respondent's counsel says, every bank entitled to the payment of checks sent by it through the exchanges of the clearing house, in due course, had a right to rely upon the liability of any other bank clearing for the non-member and unless this liability continued definitely and up to a certain period, the liability of the clearing bank would not be fixed and enforcible. Here, the effect of the constitution and rules of the clearing house upon the agreement was as though it had been stated, in so many words, that it should commence upon January 13th, 1891, and should be at an end on August 9th, 1893, after the clearances of that day had been completed. What was there in the agreement and its incidents, which contravened any rule of law or of *Page 175 policy? The plaintiffs say that the effect is to give an illegal preference under the statute; which, it is meant, would be accomplished by the payment of checks, after the insolvency of the non-member bank is known, and by the use by the clearing bank of the deposited securities in reimbursement thereof. To that I cannot agree. The statute referred to is the State Corporation Law (Chap. 687, Laws of 1892); which, in section forty-eight, contains previously-existing provisions of the Banking Law of this state. The provisions of the section forbid the assignment or transfer of any property, "when the corporation is insolvent, or its insolvency is imminent, with the intent of giving a preference to any particular creditor over other creditors of the corporation." This provision has no application to such a case as this; where, at the time when the arrangement was made with the St. Nicholas Bank, the Madison Square Bank was solvent. It would be absurd to speak of the agreement of January, 1891, as having been made in contemplation of future insolvency, or with the intent to give a preference to any creditor of the Madison Square Bank. If there is any presumption respecting the business engagements of going concerns, it is that they will be fulfilled; and, when security is exacted, it is as a business precaution, to compel exact and prompt performance, rather than a provision in contemplation of insolvency. If it were otherwise, business transactions, which have for their subject the accommodation of one corporation by another, in the loan of money, or the extension of credit, would be seriously embarrassed, if not checked. The statute recognizes the right of a banking corporation to transfer promissory notes, or evidences of debt, received in the transaction of its ordinary business, to purchasers for a valuable consideration and it may lawfully do so in pledge to secure its creditor, when it is in a condition of solvency. The deposit of securities made by the Madison Square Bank with the St. Nicholas Bank constituted a lawful pledge of its assets, to protect the former against any possible loss in undertaking to clear and pay all checks drawn upon the latter and sent through the clearing house The invalidity *Page 176 of a transfer or assignment of property by a banking corporation, under the Banking Law, is where it has been made while in a condition of insolvency, or in contemplation of it, and with the "intent" of giving a preference. The "intent" must exist and be inferable to vitiate the transaction. In this connection, our recent decision in Elmira Savings Bank v. Davis (142 N.Y. 590) may be referred to; where the question involved was whether the preference given to savings bank deposits by the State Banking Law was in contravention of the United States National Banking Law; which avoids transfers, or assignments, or deposits, made with a view to prefer a creditor. It was there said, and the observation is applicable here, that "it is the voluntary act of the national bank, in contemplation of its insolvency and with the view of then preventing the ratable application of its property, which is avoided by the national law. In the present case, while a going concern, it entered into an engagement with the savings bank, which the state law required and regulated; which vested in the latter superior rights or equities, and which, in the possible event of future insolvency, would give to it a prior claim to payment from the assets. When that event happened and the receiver was appointed, he took over the property of the insolvent concern, as trustee for its creditors and shareholders, under the same conditions as the bank held it and subject to the right of this plaintiff to be first paid in full, before other creditors were paid." So I say here, the plaintiffs, upon becoming vested as receivers with the property of the insolvent Madison Square Bank, held it subject to all rights lawfully acquired and to all superior equities; among which was the right of the St. Nicholas Bank, by virtue of an agreement, valid in its inception and at all times, to apply the securities in its possession in reimbursement of its payments of checks presented through the clearing house on the morning of August 9th, 1893; payments which it was obliged to make, as well by the rule of commercial honor, as by force of the obligations imposed by the constitution and rules of the clearing house. Nor do the cases of Overman v. *Page 177 The Bank, (30 N.J.L. 61) and Merchants' Bank v. Bank ofCommonwealth (139 Mass. 518), referred to, touch this question of the obligation of the clearing bank under the constitution and rules of the clearing house and with reference to which the non-member had contracted — a distinction recognized in theOverman case cited.
The plaintiff's counsel suggests a possible illustration of the effect of the construction, which is given to this section of the clearing house constitution. He says, all the creditors of the Madison Square Bank, becoming aware of its insolvency, might have drawn checks upon their deposits and, if they succeeded in getting them presented by clearing house banks, the St. Nicholas Bank would have been compelled to pay them, to its possible ruin. The illustration, however, proves nothing. That may be said to have been a risk assumed by the St. Nicholas Bank; but very much of the business of the land, and especially that portion which is done in Wall street, is conducted upon faith and experience has shown that it has not, in the main, been misplaced. For such a contingency as counsel suggests, it was necessary that the officers of the Madison Square Bank should have been parties to an immoral and illegal scheme. The St. Nicholas Bank must be deemed to have contemplated and to have assumed every risk, in undertaking to become responsible for the Madison Square Bank, and to have exercised such reasonable judgment in doing so, and to have taken such security against loss therein, as the practical observation and the business experience of its officers suggested.
The conclusion I have reached is that the insolvency of the Madison Square Bank did not excuse the St. Nicholas Bank from the performance of its obligations towards the clearing house banks. What rather emphasizes the interest in the question of the right of the St. Nicholas Bank to clear and pay, on August 9th, 1893, all the checks drawn upon the Madison Square Bank and presented by clearing house banks, is the fact that there were four checks, exceeding in the aggregate the sum of $300,000 which were drawn *Page 178 under somewhat peculiar circumstances. I may refer to two of them, aggregating $250,000, which were drawn by Mr. Danforth, then state treasurer, on August 8th, 1893, who had heard enough, in some way, to take alarm at the situation of the Madison Square Bank with which were state funds on deposit. He arranged to deposit them with the Manhattan Trust Company, which kept accounts with the Chase and the Continental National Banks and had its checks cleared through them. The two checks were handed into the two banks, at a little before ten o'clock of the morning of August 9th, 1893, and were at once sent, with all other checks, to the clearing house, where the business of clearances commences to be transacted at ten o'clock. The evidence conclusively shows that there was nothing unusual in this transaction. It is the general and invariable custom of the banks in New York city to pass all checks, dated upon the previous day and received between ten o'clock of that day and ten o'clock in the morning of the day following, by hand, or by mail, through the clearing house with the clearances of that morning. Checks may come in the morning by mail, or may be brought in by local depositors, before ten o'clock and it is considered to be regular and in the exercise of business prudence to have them cleared as promptly as the rules allow. In this case there is nothing to show that the officers of the Madison Square Bank knew of the manner in which the state treasurer's checks were deposited for payment by the Manhattan Trust Company, or that they had anything to do with their drawing. It appears that that company acted in good faith in the matter and Mr. Waterbury, its president, testified that there was nothing unusual, or contrary to the usual course of business, in getting Mr. Danforth's checks put promptly through the clearing house that morning and it is difficult to see how it would be material, if it was otherwise. As to the two banks, which acted for the trust company, they appear to have merely performed their duty to their depositor in passing the checks severally through the clearing house. Nor can it be pretended that the St. Nicholas Bank had any knowledge *Page 179 or notice respecting these checks, or any of the checks, which it paid in its clearances of August 9th. Its officers had no knowledge of the insolvency of the Madison Square Bank until that morning. Its notices of the day previous to the various banks, that it would no longer continue to clear for the Madison Square Bank, were based on a dissatisfaction with its failure to keep good its promised daily cash balance of deposits. Until the clearing house committee completed its examination of the condition of the latter bank, in the afternoon of the eighth of August, it was not known how it stood. The time was one of great excitement and of a distrust in financial circles, which cast its shadow over many banks, and a bank, to justify being assisted by the associated banks, must show itself to possess sufficient resources in the possession of assets of real value. The attention of the clearing house committee being called to the Madison Square Bank, their examination resulted in the advice that it should suspend. They did not decide as to the solvency of the bank. It might resume, if it succeeded in making such arrangements as would put it in the possession of funds by realization upon its assets. However that might be, the bank decided not to open its doors on the following morning. It was affirmatively testified to by the cashier of the St. Nicholas Bank that they had no suspicion of the inability of the Madison Square Bank to continue its business, when sending out notices to other banks; but thought it unsafe to continue clearing for it, in view of its past conduct. If the evidence showed any knowledge in the St. Nicholas Bank as to the particular checks, as to which so much has been urged and which it paid in the clearances of the morning of August 9th, or if it had such notice concerning the designs of their drawers as to make it an abettor in an unlawful scheme to obtain a preference over other creditors, a very different question would be presented. But there was nothing whatever to charge it with any knowledge, or notice, and all the evidence goes to prove that it acted in perfect good faith; and that being so and its payment of checks, passing through *Page 180 the clearing house on the morning of August 9th, having been made in discharge of the liability resting upon it, under the constitution and rules of the association, it not only could not, but it should not, be made to suffer a loss. The knowledge possessed by it in common with the public, in the morning of August 9th, did not change its position, nor affect its liability. The presumption was that every check presented at the morning's clearances was held for value and it was for the plaintiffs to rebut that presumption and to show that the banks presenting checks were not acting in good faith in what they did, but merely as agents for the drawers in obtaining the funds drawn against. They failed to do so. More than that, the evidence established the contrary, except in the possible instances of the two checks drawn by the Uhlmans; which were two of the four checks I mentioned as taking the clearances of August 9th, 1893, out of the ordinary. I deem it unnecessary to discuss the facts respecting them. The St. Nicholas Bank was in no respect more informed about their making, or their collection, than it was about the other checks. If there was anything irregular concerning them, I agree with the learned referee that the question would affect, not the St. Nicholas Bank, but the right of the bank which presented them to hold their proceeds. If we leave out of consideration the two Uhlman checks, the balance of account is still against the plaintiffs and their action would have to fail any way.
For these reasons, as for those which were well expressed by the very learned referee and with which they are in harmony, I think the judgment below was right and I advise its affirmance here.
All concur, except ANDREWS, Ch. J., and PECKHAM, J., dissenting.
Judgment affirmed. *Page 181