This appeal involves the right of the petitioner, G.D. Sanders, who is appellant here, to a preferred claim upon the assets of the Bamberg Banking Company, an insolvent banking corporation. His claim arises out of certain facts, admitted by all the interested parties, as follows:
On December 31, 1930, G.D. Sanders, in person, presented to the bank a check drawn by one of the depositors of the bank against his deposit account for $3,273.34, payable to M.K. Sanders and properly indorsed by the payee. At the time the bank had plenty of cash in its vault to meet the payment of the check. It also had on deposit to its checking account in the South Carolina National Bank of Charleston approximately $42,000.00. It did not at the time owe any bills payable. The check presented by the petitioner was charged to the account of the drawer, and the bank made settlement therefor by giving the petitioner $100.00 in cash and its draft on the South Carolina National Bank in the sum of $3,173.34, and, when that draft was issued, correct charge was made on the Bamberg bank's books against its checking account at the South Carolina National Bank.
The Bamberg bank closed its doors on January 15, 1931, and on that day still had on deposit to its credit on the books of the South Carolina National Bank around $7,000.00 The draft for $3,173.34, issued to the petitioner, had not been presented for payment by him, and neither had it been accepted or certified; accordingly, the amount of the draft drawn by the Bamberg bank in favor of the petitioner had not been charged on the books of the South Carolina National *Page 339 Bank against the Bamberg bank's account. The officials of the Bamberg bank had not been informed, however, that the draft on the Charleston bank had not been paid until after the Bamberg bank had closed, and therefore, as to the Bamberg bank and its officials, the balance of the Bamberg bank on deposit in the Charleston bank was $3,173.34 less than the credit balance shown by the books of the Charleston bank. Shortly after the closing of the Bamberg bank, petitioner presented his draft to the Charleston bank, but payment was refused; the sole ground therefor being the reason that the Bamberg bank had closed.
A receiver was appointed for the Bamberg bank, and the funds of that bank on deposit in the Charleston bank were turned over to him. Included in such funds was the amount of the unpaid draft issued to Sanders; so the receiver obtained possession of $3,173.34 more in cash than would have come into his hands if the petitioner had presented the draft of the Bamberg bank for payment before it closed.
The petitioner took the position that the transaction in which he received the draft drawn on the Charleston bank did not in anywise constitute him a depositor or creditor of the Bamberg bank, but the draft given to, and accepted by, him was given in lieu of cash, with the full intent on the part of the bank and himself that the bank's funds on deposit in the Charleston bank should be charged with the payment of the draft. He filed with the receiver his claim, asking that the draft be paid as a preferred claim, but the receiver refused to allow the claim for preference. Thereafter proper suit was brought by the petitioner to establish his claim for preference; he asserting `that under the laws of this State," and, particularly, under the Act of the General Assembly, approved March 28, 1930 (36 Stats., 1368), entitled "An Act to Expedite and Simplify the Collection and Payment by Banks of Checks and Other Instruments for the Payment of Money" (Sections 6948-6963. 1932 Code), "the said claim is entitled to preference." *Page 340
Upon the agreed statement of facts, the Special Judge, Hon. T.M. Boulware, who heard the cause, sustained the position of the receiver that the Act of 1930 was unconstitutional, and he held that, in the absence of statutory authority, the claimed preference could not be allowed, for the reason that the assets of the receivership had not been swelled.
The petitioner appealed to this Court from the order of the Special Judge, on the ground that he was in error in holding the Act of 1930 to be unconstitutional, and on the further ground that he erred in his holding that the petitioner's right to preference did not exist, independently of the statute, because the assets of the receivership had not been swelled.
The receiver, as sustaining grounds for the upholding of the order appealed from, in addition to his claim that the statute was unconstitutional, urged that the Act of 1930 was inapplicable to the facts of this case, since the petitioner had requested, or accepted, the draft in question, and that the petitioner's delay in presenting the draft constituted such laches as to deprive him of any right to a claim for preference.
We first heard the appeal at the November, 1931, term of the Court. At that time, the point was made by counsel for the receiver, apparently for the first time in the cause, that the presentation of the depositor's check over the bank counter took the case out of the application of the provisions of the Act of 1930, and therefore the petitioner-appellant is not entitled to the benefit of the provisions of that Act.
After some consideration of the issues involved in the appeal, we set the case down for reargument on this particular issue: "Is the appellant, Sanders, entitled to a preference independently of the 1930 Act?"
At the instance of the appellant's counsel, we later granted permission for them to discuss, also, in the reargument of the cause, the Act of 1930, with especial reference to the *Page 341 position taken in the argument of respondent's counsel that the Act was limited in its application only to checks presented through banking channels.
Realizing that the main question involved in the appeal is of very great importance, the Court has taken much time to consider and determine it.
Our recent decision in the case of Ex Parte Witt, Receiver,v. People's State Bank of South Carolina et al., 166 S.C. 1,164 S.E., 306, 309, which was filed on the day the reargument of this case was heard, has determined all questions relating to the constitutionality of the Act of 1930. The decree on circuit of his Honor, Judge Ramage, in theWitt case was adopted and approved by this Court. If the reasoning of that decree, which was evidently also approved by us, is now followed, what was said there would appear also to determine any controversy concerning the application of the 1930 Act to the facts of the case at bar, for in his decree Judge Ramage pointed out that the Act of 1930 made "no discrimination whatsoever in favor of the ownersof items who sent them through a bank for collection asagainst those owners who presented them in person to thedrawee bank," and that "Section 13 dealing with insolvencyand preference gives all classes alike — `the owners of theitems' — the same right of priority." Judge Ramage also said in his decree that the 1930 Act "is not limited to cases ofcollection, but embraces the whole subject of collection andpayment," and that the Act "provides for one very common feature or incident to the mode of such payments, when such payment is made by giving a draft on another bank which is no good and fails to produce actual payment because of the intervening insolvency of the bank giving such draft."
There was also on the part of Judge Ramage a suggestion, and to our mind a proper one, that the underlying reason of the 1930 Act, manifestly applicable to checks presented over the counter, as well as to those presented through *Page 342 banking channels, was that "it would defeat the bankingsystem to require payment in currency of every item."
It seems to us, therefore, under the language of the opinion in the Witt case, that there is no basis of differentiation to justify the excluding of the petitioner from the benefit of the provisions of Section 13 of the Act of 1930; for that section, as construed in the opinion, has definite application to all owners of items presented for payment at the insolvent bank, irrespective of the mode of presentation adopted by any of such owners.
The right of preferment, under the provisions of Section 13 of the Act, must be interpreted and given effect in connection with the general rule of the law declared in the Negotiable Instruments Act, which provides that "A check must be presented for payment within a reasonable time after its issue or the drawer will be discharged from liability thereonto the extent of the loss caused by the delay." (Italics added.) Section 6937, Code of 1932.
The reason for this provision is that a check, while not of itself operating as an assignment of funds, "however, may properly be regarded between the parties as something of anappropriation to the payee of so much money on deposit in the bank, which the payee may obtain by calling for it." (Italics added.) Anderson v. Elem, 111 Kan., 713,208 P., 573, 23 A.L.R., 1202. The effect of that provision in the law seems to us to be well stated in Ruling Case Law in the following language: "If a check is not presented within the time fixed, and there is a loss due to delay, such loss falls on the holder of the check. * * * But it is now established by the overwhelming weight of authority, and beyond contradiction, that delay, short of the period prescribed by the Statute of Limitations for an action on the check or the original consideration, in presenting a check to the drawee for payment, does not release the drawer from liability, either on the check or on the original consideration for which it was given, unless he is damaged or prejudiced *Page 343 by such delay. And in a suit upon such a check against the drawer, a plea by him, alleging the delay, but silent as to loss, is properly stricken on demurrer." 5 R.C.L., 511. (Italics added.)
To the same effect is the language of Mr. Justice Field for the Supreme Court of the United States that "thedrawer is not discharged by the laches of the holder in presentmentfor payment, unless he can show that he has sustainedsome injury by the default." (Italics ours.) Bull v.First National Bank of Kasson, 123 U.S. 105,8 S.Ct., 62, 64, 31 L.Ed., 97. See, also, 21 R.C.L., 65; Morse on Banks and Banking (6th Ed.) Vol. 1, § 421; note, page 881, 4 A.L.R.; Anderson v. Elem, supra; Nuzum v. Sheppard,87 W. Va., 243, 104 S.E., 587, 11 A.L.R., 1024.
If the drawee bank, the Charleston bank, had closed before the presentation of the draft on the part of the petitioner, there would be, perhaps, serious question as to the right of the petitioner to recover against the drawer bank, the Bamberg bank. The petitioner took the risk that might have been as to the closing of the drawee bank, but the drawee bank did not close. It was the bank that issued the draft that failed. The statutory provisions intended to safeguard the drawer of the check from the risk of loss not due to the drawer's fault, but to the fault of the payee, are clearly without application here to deprive the payee of the draft of any right thereunder.
It seems equally clear that the doctrine of laches, as applied to the enforcement of equitable rights, does not apply to deprive the petitioner of any right to preference he may have either under the provisions of the 1930 Act or under the doctrine of equitable assignments, for, said Chief Justice Fuller of the Supreme Court of the United States: "The doctrine of Courts of equity to withhold relief from those who have delayed the assertion of their claims for an unreasonable length of time is thoroughly settled. Its application depends on the circumstances of the particular case. It *Page 344 is not a mere matter of lapse of time, but of change of situation during neglectful repose, rendering it inequitable toafford relief." (Italics added.) O'Brien v. Wheelock,184 U.S. 450, 22 S.Ct., 354, 370, 46 L.Ed., 636. See, also, Pomeroy's Equity Jurisprudence (4th Ed.), § 1442.
But, even if the provisions of the 1930 Act do not sustain the appellant's right to a preference, he is, nevertheless, entitled to one, under the decisions of this Court, on the admitted facts and circumstances under which he was given, and received, the draft in question. We do not see how it is possible to distinguish the legal principles involved here from those recognized and declared in the following decisions of this Court: Railway Express Agency v. Bethea,165 S.C. 230, 163 S.E., 637, 638. Hampton Loan ExcangeBank v. Lightsey, Receiver, 155 S.C. 228,152 S.E., 425, 427. Ex Parte Berger, 81 S.C. 244,62 S.E., 249, 22 L.R.A. (N.S.), 445. and Livingstain v. ColumbiaBanking Trust Co., 77 S.C. 305, 57 S.E., 182, 22 L.R.A. (N.S.), 442, 122 Am. St. Rep., 568. All these cases have been under such recent review and consideration that it seems unnecessary to discuss them in an extended manner.
All the cited cases have fully recognized the principle of equitable charges or rights, arising from circumstances connected with the giving of the checks in question, that is not at all dependent on the rule existing in this State prior to the adoption of the Negotiable Instruments Act in 1914, which was that a check was,' of itself, a legal assignmentpro tanto of the deposit account on which it was drawn. The rule, while still existing and in force at the time of the decisions in the Livingston and Berger cases, was held inapplicable in those particular cases because of appropriation of the drawee bank of the deposit account on which it had a prior lien. Therefore it became necessary for this Court, in the Livingston and Berger cases, to consider the rights of the holders of the checks from a standpoint of equitable consideration, *Page 345 and that consideration governed the Court in the conclusions reached in the decisions.
The Lightsey and Bethea cases, supra, arose long after the passage of the Negotiable Instruments Act. The decisions in those cases, giving the holders of checks rights of preference in assets of the bank over the depositors and general creditors of the insolvent bank, were based solelyon equitable considerations arising out of the circumstances connected with the giving of the checks, which were quite similar to the admitted facts in the present case. In theLightsey case it was pointed out that the receiver "takes over the assets of the bank with its concomitant burdens," and "can have no higher right" than the insolvent bank had. It was also pointed out that the transaction in which the draft was issued "was practically a cash transaction, a substitute for cash, the benefit of which the Hampton bank immediately received by lessening its liability to its depositors whose checks were charged up to them." The right of subrogation, properly discussed in the decision, was, of necessity, dependent on the finding that the draft, considered in connection with all the circumstances under which it was given, was an equitable assignment of the funds on which itwas drawn.
A situation similar to that involved in the Lightsey case existed in the Bethea case, where the checks of customers drawn on the bank issuing the draft constituted part of the consideration for the purchase of the draft. It was pointed out in the opinion in that case that the checks drawn on the issuing bank "could have been collected before the purchase of exchange was made; the parties to the transaction in such case merely waiving the actual delivery and redelivery of cash." The right of subrogation was not involved in the decision as the funds turned over to the receiver by the drawee bank were sufficient for the payment of the dishonored drafts. The claim was held, under the circumstances, *Page 346 to be "a preferred claim and entitled to payment in full." (Italics added.)
A similar viewpoint, giving effect to the doctrine of equitable assignments, has been accepted and expressed in quite a number of recent leading cases, many of them well considered, from other jurisdictions, where it has been held that, notwithstanding the Negotiable Instruments Act, the giving of a check, together with the surrounding circumstances, may amount to an assignment pro tanto of funds in the bank on which drawn. See Federal Reserve Bank v.Peters, 139 Va., 45, 123 S.E., 379, 383, 42 A.L.R., 742.Central Trust Co. v. Bank of Mullens, 108 W. Va., 12,150 S.E., 137. Salzburger Bank v. Standard Oil Co., 173 Ga. 722,161 S.E., 584, 589. Fourth Street Bank v. Yardley,165 U.S. 634, 17 S.Ct., 439, 41 L.Ed., 855. The governing principle, justifying those decisions, is made very clear and exceedingly well stated in Morse on Banks and Banking (6th Ed.), Vol. 2, p. 1116, where, in a discussion of the right of check holders as between the drawer and payee, the author says:
"The same reasons of good faith and security in business transactions which induce the law to sustain a bona fide sale of property, or assignment of bills or notes, against a subsequent assignee in insolvency of the assignor, apply to the case of a check.
"A vast amount of business is done by checks. It wouldnot be good faith in the drawer to withdraw his funds aftergiving the check, and it is elementary law that, in an assignment for the benefit of creditors, the latter have no greater rights than the assignor except in case of an illegal transfer." (Italics ours.)
In the case of Burrows v. Burrows, 240 Mass. 485,137 N.E., 923, 20 A.L.R., 174, there is found a very clear illustration of a proper application of the provision of the Negotiable Instruments Act that a check does not of itself operate as an assignment of funds. In that case the defendant *Page 347 had received a check from her mother as a gift, which she cashed after her mother's death. The Court held her accountable for repayment of the amount of the check to the estate of her mother. In the opinion, it was pointed out that there was no evidence to warrant a finding of any valuableconsideration for the delivery of the check.
In the Salzburger Bank case, supra, the Court points out that by clear implication the provisions of the Negotiable Instruments Act recognize equitable assignments, and further said: "The provision that they do not by themselves operate as equitable assignments clearly implies that they,when taken with other facts, may operate as such equitable assignments." (Italics added.) The positive statement is made in the opinion that "our Negotiable Instruments Law was not intended to, and does not, abrogate equitable assignments and implied trusts as they existed at the time of its passage." In that exceedingly well-considered opinion, the Court stated the following conclusions: "The transaction in this case clearly operated as an equitable assignment of the funds of the drawing bank in the drawee bank to the extent of the amount of the checks drawn by the drawer upon the drawee. * * * It would be inequitable and unjust, under these circumstances, to permit the bank to hold these funds and not to pay these checks. Creditors of a bank donot stand in any better position than the bank itself, andshould not be permitted to take these funds away from theplaintiff." (Italics added.)
In the case of Federal Reserve Bank v. Peters, supra, where the bank draft was issued in remittance for the collection made of a customer's check, it was held that, as the giving of the draft was a substitute for cash, the deposit was impressed with a trust for the payment of the draft. In stating the consideration leading to such conclusion, it was pointed out, as a highly evidentiary circumstance of the nature of the transaction, that the cashier of the remitting bank deducted the amount of the remittance from *Page 348 the apparent balance due from the bank upon which the draft was drawn, "just as if this amount had already been withdrawn from the latter bank and transferred." This circumstance was considered sufficient to establish the intention of the cashier to set apart such portion of its balance in the drawee bank as was necessary to meet the draft.
Similarly, in the case at bar, the bank draft received by Sanders in settlement for the check drawn on the bank was issued as a substitute for cash; and Sanders took it upon the faith of its collectability from the drawee bank. The draft given and received under such circumstances (Sanders parting with his property in the depositor's check) implied the understanding of the transaction that the draft was good; that the issuing bank had funds with the drawee bank, subject to its checking account, sufficient for payment; and that sufficient funds from said account to meet the payment would be devoted to that end and not used for any other purpose. This intent of the transaction, to make an appropriation of the deposit account pro tanto to meet payment of the check when presented, was still further evidenced on the part of the issuing bank in the entry made on its books which depleted by the amount of its check its apparent balance at the drawee bank.
We cannot agree with the view advanced by respondent's counsel that the deposit account might still be regarded and treated as rightfully subject to the bank's control, and to its rights, at will, to withdraw the deposit account without leaving sufficient funds to meet the outstanding draft. It is true that, under the provisions of the Negotiable Instruments Act, a bank draft is not of itself a legal assignment of any part of the funds upon which the draft was drawn. But this rule of law has nothing to do with the rule of equitable consideration which recognizes equitable assignments. It has been well said that "the doctrine of equitable liens would never have come into existence if it were true that one who claims such a lien must first show a lien at *Page 349 law. Equitable liens became necessary precisely on accountof the absence of similar remedies of law." (Italics ours.) See Fee-Crayton Hardwood Co. v. Richardson-Warren Co., (D.C.), 18 F.2d 617, 623.
In 5 R.C.L., 498, it is said that "it is the sole function of a check to effect the transfer of money; and, similarly, in 48 C.J., 617, it is said that the issuance of a check for an obligation is "for convenience often treated as the passage of money." From a standpoint of equitable consideration, the moment that the Bamberg bank issued its draft on the Charleston bank, as a substitute for cash, its deposit account was diminished by the amount of the draft. It appeared on the books of the bank, evidencing the understanding of the transaction, that the bank no longer owned that much of its deposit; and it would not have been good faith for the bank to withdraw the funds after giving the draft.
Reference has already been made to the provisions of the 1930 Act, which was designed to provide uniformity of law governing the practice of the banks and the rights of the parties in respect to the collection and payment of checks. It is quite obvious that the uncertainty of rights under the decisions, added to the uncertainties arising because of risks of loss unless payments and remittances be required in cash, have had serious effect, and quite conceivably may result in even more serious and embarrassing consequences. For, as was said in Witt, Receiver, v. People's State Bank et al.,supra, "it would defeat the banking system to require payment in currency of every item."
Under the banking practice as it stood up to the time that the statutory laws governing check collections and payments was enacted, it was a well-recognized rule that the obligation of the drawee bank was to pay in money and nothing else, irrespective of the mode of presentment of the checks.Ex Parte Wachovia Bank Trust Company, 160 S.C. 104,158 S.E., 214. Federal Reserve Bank of Richmond v. *Page 350 Malloy, 264 U.S. 160, 44 S.Ct., 296, 68 L.Ed., 617, 31 A.L.R., 1261.
The great burden to which the banks may become subject unless some manner of relief is provided is pointed out by Circuit Judge Parker in Cleve v. Craven Chemical Co. (C.C.A., 4th Circuit), 18 F.2d 711, 713, 52 A.L.R., 980, in his discussion of the North Carolina statute (applicable expressly to checks presented "by or through any Federal Reserve Bank, Post Office, or Express Company, or any respective agents thereof") which — as to such checks — sought to remove (when the drawer acquiesced) the absolute requirement of the common law that a check presented at the bank counter would be paid in cash. In speaking of the effect of presenting the checks over the counter of the bank and demanding payment in cash, one of the embarrassments particularly stressed was the effect to reduce the income-producing assets of the bank "through the necessityof keeping in their vaults in cash a much larger part of theirresources than had theretofore been customary."
It is easy to imagine even more serious dangers in many communities arising out of the personal presentation of checks over the counter. The payment of large amounts of cash over the counter to owners of items, personally presenting the items and demanding cash, would no doubt be calculated, in many instances, in these times of unsettled banking conditions, to precipitate runs on even solvent banks and bring community disaster as a consequence.
When the statute is considered from the viewpoint of banking needs and convenience, it is manifest that the particular provisions of the Act, as contained in Section 13, were not designed, in their primary purpose, to give preference to one class over another; but the real purpose was to relieve bank conditions, as far as practicable, from one of its most serious present day perils.
It is our opinion that the appellant was entitled to the preference he claimed, and, accordingly, the order appealed from should be reversed. *Page 351