Hanover Nat. Bank of New York v. First Nat. Bank of Burlingame

SANBORN, Circuit Judge.

The Hanover National Bank of the City of New York, the plaintiff in error, discounted the note of G. M. Sheldon for $5,000, due December 24, 1890, and paid the proceeds of this discount to the defendant in error, the First National Bank of Burlingame, Kan. When that note fell due, Sheldon failed to pay it, and the New York bank charged it up against the Kansas hank, but the latter refused to allow or pay any part of this charge, and insisted that the note had been discounted for Sheldon, and not for it. In this way the issue arose whether this note for $5,000 was discounted for Sheldon or for the Kansas hank, and when this case came to trial that issue was properly presented by the pleadings. At the close of the plaintiff’s evidence the court instructed the jury to return a verdiqt.for the defendant, and the only question for consideration here is whether or not there was any evidence which would have sustained a verdict for the plaintiff.

The defendant admitted in its answer that it received from the plaintiff the proceeds of the discount of the Sheldon note, hut alleged that it immediately turned them over to Sheldon pursuant to an understanding between the plaintiff and Sheldon. At the former trial 6f this case, which was reviewed by this court in First Nat. Bank of Burlingame v. Hanover Nat. Bank of New York, 13 C. C. A. 313, 66 Fed. 34, there was evidence that the Kansas bank placed the proceeds of tAe note to- the credit of Sheldon, and that he used them; but no such evidence was introduced at the trial now under consideration. There was no proof of the averments of the answer in this respect, hut the defendant left the proceeds where the plaintiff’s evidence placed them, in the Kansas hank, and there was no evidence that Sheldon ever received the possession or use of one dollar of them. These were the facts of which there was evidence at the trigl we are now reviewing: Sheldon was the president of the Kansas bank, and managed and controlled its operations. For all business purposes he was the bank. In the fiist part of September, 1889, lie called upon the cashier of the New York bank, and negotiated with him for the discounting of promissory notes for the Kansas bank. In this interview he said that he did not want to put the name of the Kansas hank on the notes it wished to have discounted, because he did not wish to state the bank’s indebtedness on account of these notes in the reports to the comptroller of the bank’s financial condition, but that his bank would transfer its New York account from the Chemical National Bank to the plaintiff, and would authorize the latter to charge these notes to its account as they matured, and, in addition to this .security, Sheldon would sign or indorse the notes individually before they were discounted. The New York bank accepted this proposition. It agreed to discount for the Kansas bank notes signed or indorsed by Sheldon individually, and the Kansas bank agreed to authorize the New York bank to charge these notes to its account as they matured. The officers of the New York bank never had any conversation with Sheldon about discounting notes or loaning money to him individually. Immediately after this agreement was made, and pursuant thereto, the New York hank, on September 6, 1889, discounted for the Kansas bank a note for $2,500 made by <J. A. Finch & Co., and indorsed by Sheldon without the indorsement of "the Kansas hank. This note was subsequently twice renewed, and it was finally paid by the Kansas bank. On October 10, 3889, a note oiMhe East Kansas Loan & Investment Company for $31,603.35, but without the indorsement of the Kansas hank, was discounted for the latter, and the proceeds paid to it in the same way. On February 24, 1890, a note of the same company for $4,828.32, indorsed by Sheldon, but without the indorsement of the Kansas bank, was discounted, and the proceeds were paid over in the same way. All these notes were charged to the Kansas bank, and were paid by it without objection. On September 23, 1890, Sheldon’s note for $5'090, in controversy in this case, was discounted by the New York bank, and its proceeds were paid over to the Kansas bank in the same way. The first reference to this discount in the correspondence from Kansas is in a telegram of September 8,1890, concerning the bank’s matters, which reads:

“Hanover National Bank, New York: What about five thousand discount? Can you take it? Answer. Charge up twenty-five hundred due tenth. Answer. C. M. Sheldon, Pt.” •

The second reference to it in that correspondence is in a letter of September 11, 1890, signed in the same way. The third communica» tion from Kansas concerning it is dated September 20, 1890, and requests the cashier of the New York bank to “place proceeds to our credit,” if he can use it, and is signed “C. M. Sheldon.” The correspondence from Kansas is signed indifferently “O. M. Sheldon” and “C. M. Sheldon, Pt.,” hut refers alike to bank matters. The answer to this letter of September 20, 1890, was:

“New York, Sept. 23rd, 1S90.

“C. M. Sheldon, Prest, Burlingame, Kansas: Letter twentieth received. Note credited your account. Jas. T. Woodward, Prest.”

—And the proceeds of the note were on that day credited to the Kansas bank, and not to Sheldon. There is much more testimony in this record, but enough has been recited to show that there was ample evidence here to warrant a finding by a jury that Sheldon’s note was discounted for the Kansas bank, and not for him, under the agreement of September 6, 1889. This issue must be examined and determined in the light of the prior transactions and the course of business between the banks and in view of the fact that the New York bank had the right to rely upon these, and, in the absence of notice to the contrary, to presume that the same course of action was continuing. The Kansas bank had the right to borrow money, and to procure a discount of its notes. It had the same right to borrow money and to procure a discount of its notes upon its oral as upon its written promise, and its oral agreement to pay the notes it procured to be discounted when they matured, together with the fact that it received their proceeds, charged it with as conclusive a legal liability as its promissory note or its indorsement would have created. Sheldon was the president and the actual manager of the bank. He had ample authority from it, by virtue of his official- position, to borrow money, to procure a discount of its notes, to agree on its behalf to repay the money borrowed, and to contract on its behalf to pay the discounted notes as they matured. Auten v. Bank, 174 U. S. 125, 149, 19 Sup. Ct. 628, 48 L. Ed. 920; United States Nat. Bank v. First Nat. Bank of Little Rock, 24 C. C. A. 597, 600, 79 Fed. 296, 299, 49 U. S. App. 67, 72; Bank v. Smith, 23 C. C. A. 80, 77 Fed. 129, 135; Fleckner v. Bank, 8 Wheat. 338, 360, 5 L. Ed. 631; Wild v. Bank, 3 Mason, 505, Fed. Cas. No. 17,646; Bank v. Perkins, 29 N. Y. 554, 569, 86 Am. Dec. 332; Cooke v. Bank, 52 N. Y. 96, 114, 115, 11 Am. Rep. 667; Bank v. Wheeler, 21 Ind. 90; Merchants’ Bank v. State Bank, 10 Wall. 604, 650, 19 L. Ed. 1008. There was evidence in this case for the consideration of the jury which ■tended to prove that the Sheldon note was discounted for the Kansas bank, and that that bank agreed with the plaintiff that it would pay it at its maturity.

It is said that the agreement was not that the New York bank might charge the discounted notes to the Kansas bank as they matured, but that in the case of each discount the Kansas bank would give such authority, and that, while it did so in every other instance, it failed to do so in the case of the Sheldon note, because the authority is signed by C. M. Sheldon individually. The correspondence clearly indicates that Sheldon’s individual signature was often made when he was acting and writing for the bank. Whether or not this was true in this particular instance is not material, because an agreement to authorize a charge of a note to be discounted constitutes as effective a creation of a liability to pay it after it bas been discounted as the actual grant of the authority.

Another contention of counsel for the bank is that the contract between the two banks is incapable of enforcement, because Sheldon informed the New York bank that the reason why he wanted to make the agreement without putting the indorsement of the defendant on the paper was that he did not wish to report to the comptroller and to publish the fact that his bank had procured these rediscounts. It is insisted that this statement of Sheldon when the contract was made injected into it a fatal vice, because it brought home to the New York bank knowledge of the fact that the contract might assist Sheldon in evading or violating the provisions of section 5211 of the Revised Statutes, which requires the presentation to the comptroller of the currency, and the publication of the reports of the resources and liabilities of a national bank. But there are several reasons why this position is not tenable. In the first place, the argument is founded on the principle that an action cannot be maintained on a contract that is illegal or against public policy, in which both parties are equally culpable. Bartle v. Coleman, 4 Pet. 184, 7 L. Ed. 825; Trist v. Child, 21 Wall. 441, 22 L. Ed. 623; Marshall v. Railroad Co., 16 How. 314, 14 L. Ed. 953; Hinnen v. Newman, 35 Kan. 709, 12 Pac. 144. But this rule has no application to an agreement which has no consideration, and which requires the performance of no act that is either illegal or against public policy; and that is the character of the contract here in issue. Neither the intention of Sheldon not to report the rediscounts nor his statement of that intention constitutes any part of the consideration of this agreement. The only consideration for the advances of the New York bank was the discounts and the interest it would obtain, while, on the other band, the only consideration for the promise of the Kansas bank was the use of the money it would secure, and the excess of discounts and interest it would earn above those that it would pay. The intent or purpose of Sheldon could not have been a part of the consideration of the agreement, because neither he nor the Kansas bank promised to accomplish that purpose, and there is no evidence that it ever was accomplished. It was at most a mere collateral, incidental, unaccomplished purpose, and could constitute no bar to the enforcement of the agreement. The mere fact that a contract the consideration and performance of which are lawful incidentally assists one in evading a law is no bar to its enforcement. Green. Pub. Pol. p. 538, rule 464; House v. Soder, 36 Tex. 629; Gerhard v. Neese, Id. 635; Jefferson v. Burhans, 29 C. C. A. 481, 85 Fed. 949, 58 U. S. App. 586, 593, 595,

Another reason why the statement and intention of Sheldon to violate the provision of the national banking act to which reference has been made constitutes no defense to an action upon this contract is that the penalties for such a violation are prescribed by that act, and an avoidance of the unreported legal liabilities of the bank is not among them. If Sheldon had accomplished his purpose, if he had actually failed to report these rediscounts, the performance of this contract might, nevertheless, have been compelled. Sections 5213 and 5209 "of the Revised Statutes prescribe penalties of fines and imprisonment for a failure to make a true report of the resources and liabilities óf a bank. But the acts of congress nowhere declare that the. contracts on which those resources and liabilities are based shall become either void or unenforceable on account of such failure. Where a statute commands certain parties to do certain acts, and prescribes the penalties for their violation of its command, it is not the province of the courts to inflict other penalties upon innocent parties not named in the law on account of such a violation. End. Interp. St. § 458; Speer v. Board, 32 C. C. A. 101, 110, 88 Fed. 749, 758, 60 U. S. App. 38, 53; Bank v. Whitney, 103 U. S. 99, 102, 26 L. Ed. 443; Bank v. Matthews, 98 U. S. 621, 627, 25 L. Ed. 188; Bank v. Stewart, 107 U. S. 676, 2 Sup. Ct. 778, 27 L. Ed. 592; Gold-Mining Co. v. Rocky Mountain Nat. Bank, 96 U. S. 640, 642, 24 L. Ed. 648; O’Hare v. Bank, 77 Pa. 96, 102; Weber v. Bank, 12 C. C. A. 93, 64 Fed. 208, 210; Westheimer v. Weisman, 60 Kan. 753, 758, 57 Pac. 969; Town of Milford v. Town of Worcester, 7 Mass. 48; Parton v. Hervey, 1 Gray, 119; Rex v. Inhabitants of Birmingham, 8 Barn. & C. 29. WTiere a statute imposes a penalty on an officer for solemnizing a marriage under certain circumstances, but does not declare the marriage void, it is valid, but the penalty attaches to the officer who performed the prohibited ceremony. Town of Milford v. Town of Worcester, 7 Mass. 48. Section 5136 of the Revised Statutes impliedly forbids a national bank to loan money upon real-estate security. But a mortgage upon real estate given to a bank to secure a contemporaneous loan or future advances is valid between the parties, and may be enforced. Bank v. Matthews, 98 U. S. 621, 25 L. Ed. 188; Bank v. Whitney, 103 U. S. 99, 26 L. Ed. 443. Section 5201 expressly prohibits a loan by a national bank upon a pledge of its own shares. But such a pledge was enforced' in Bank v. Stewart, 107 U. S. 676, 2 Sup. Ct. 778, 27 L. Ed. 592. Section 5200 forbids any bank to loan to one person or firm an amount in excess of one-tenth of its actually paid capital stock. But it is no. defense to an action for the recovery of money loaned by-a bánk that the amount of the loan exceeded the limit prescribed by this section. Gold-Mining Co. v. Rocky Mountain Nat. Bank, 96 U. S. 640, 24 L. Ed. 648; O’Hare v. Bank, 77 Pa. 96; Pangborn v. Westlake, 36 Iowa, 546. Section 5202 provides that no national bank shall “be- indebted or in any way liable to an amount exceeding the amount of its capital stock * * '* paid in * * * except on’-’ circulation, deposits, special funds, or declared dividends. But it is no defense to an action for a debt of the bank that its indebtedness exceeded the limitation fixed by this provision of the banking act. Weber v. Bank, 12 C. C. A. 93, 64 Fed. 208.

Finally, the contract upon which this action is founded was neither wrong in itself nor was it forbidden by statute. There was no moral turpitude in it, and there was nothing prohibited by law or by public policy either in its consideration or in its performance. The -proposed omission of Sheldon to report and publish the rediscounts was not evil in itself. It was wrong only because the statute had- directed that a true report should be made and published. In the absence of such a statutory provision, it was as right morally to fail to make and publish as it was to make and publish such a statement. The evidence tends to prove that the New York bank has performed its part of the agreement; that it has discounted the Sheldon note, and paid its proceeds 1o the Kansas bank. No rule of morals or of law occurs to us which requires a court to permit this defendant to retain'all the benefits of tbis agreement, to repudiate its burdens, and to violate the law which requires it to pay its just debts, simply because its president once had an intention to violate another law. One who has received the benefits of the complete performance by the plaintiff of a contract which was neither malum in se nor malum prohibitum cannot successfully defend an action for the payment of his indebtedness which lias accrued therefrom on the ground that either he or another intended to do some unlawful act which was no part of the consideration nor of the performance of the agreement. Armstrong v. Toler, 11 Wheat. 258, 272, 278, 6 L. Ed. 468; McBlair v. Gibbes, 17 How. 232; 235, 236, 15 L. Ed. 132; Brooks v. Martin, 2 Wall. 70, 81, 17 L. Ed. 732; Planters’ Bank v. Union Bank, 83 U. S. 483, 500, 21 L. Ed. 473: The judgment below is reversed, and the case is remanded to the court below, with instructions to grant a new trial.