L MiR.] KANSAS CITY SOU. 1 4 -,Y-: CO: v. FIRST NAT. 447
BANIC OF FT: SMITH. • KANSA§ CITY SOUTHERI :T RAILWAY COMPAN " FIRST NAttijA BAritc. oi . -rr."SmtrH. '• • ; , .0,pinion delivered June I.. , BILLS AND NOTES-BANK RECEIVING CHECK FROth INSOLVENT :BANK. , —A bank whose •title to .a check received , from ;a. ,cprrespondent , bank was defective because of the , fraud• of .the correspondent bank in issuing , i ts eicchinge, in payinent therefor during insol- ' vency; was not entitled to recover frOm the indorser' 'affer''Pay-;.• ment had been' Stopped and the check protested, on a mere . showing;that the iniohrent banki wasP credited with the amount ,of ,the check before knowledge of , its insolvency,, unless plaintiff bank actually parted with value. . BILLS AND NOTES-CHARGING BACK :CHECK OF INSOLVENT, BANK.-7. A bank Which received a 'cheek 'froth. a cori . espondent bank by ' negotiation, crediting the' amOnrit"thereof,"could; 'on learning Of corresPondent bank's insolvency, charge .the amount haek and return the check to' the exaininer while, the; bank had. possession , of the check, or, after the , cheek was returned protested. 3. BILLS AND NOTES-RIGHT TO cHARGE BACK , THE CHECK OF INSOLVENT BA. NK.-A bank which paid out checks received from , an:insolvent ' bank, , and charges the amount tO the amnia of an , insoiveni bank, after knowledge of its iiisolVency, doek'sa at itS Own 'peril, as respects its claim of f bona ficlO •purchase ,by , crediting proceeds•Of the check. , ' • 4. TRIAL,-ABSTRACT, INsTaticrIoils.•,,An instruction which . asSumes ta state of facts not supported by„the evidence,is erroneous. 5 . : . . • BILLS AND NOTES-FRA . U DULENT C • HECK-BURDEN OF FROOF. 7 -A. bank whose title , to a check was defective because of fraud perpetrated by ceirespondent bank, of which theo'cheek was 'received; had " the burden, in an action againSt 'the indorser, to prOira that' it acquired title as holder in due course. • .• . • : 6. BILLS AND , NOTES-FRAUDULENT CHECK.-A, bank Which 'purchased , a check with , exchange,drawn by it on : another bank at the time when the drawer , bank was , hopelessly insolvent was: guilty of fra'u'd on 'Ori indorSer, rendenrig the eitle Of the drawer hank ' the check, which it' transferred by the 'negotiation, 'defective' as • respects the burden-of proof.. •', " , Appeal , from Sebastian circnit geurt, .F , ort , Smith District ; , ..lo/i,n E. Tatum,,Jucige . ; reversed., ,,, .„ . James B. .McDonouok Joseph R. Brown and
JaMes B. MeDonougk: for . appellant. • Daily ,ce .WoOds, for 'aPpellee: •' ;
448 KANSAS CITY SOU. H y .. CO. V. FIRST NAT. [174
BANK OF FT. SMITH. MOBANEY, J. On April 12, 1924, the George F. Col-lins Company, an . Oklahoma Corporation, being indebted to appellant in the sum of $776.12, on account for freight, drew its cheek on the American National . Bank of Sapulpa, Oklahoma, .for said amount, payable to- appellant, and delivered same to it. On April 21, 1924, appellant's agent . at Poteau, Oklahoma, took this check and others to. the First National Bank of Poteau, and purchased exchange in the s form of a draft for the total amount of said checks, on the Drovers' National Bank of Kansas City, Mo., payable to appellant, , and remitted same to appellant's treasurer At Kansas City. On April 22, 1924, the First National Bank . of Poteau closed its doors on account of insolveney, and a national bank examiner took charge of its affairs, and, when said draft was presented to the Drovers' National Bank in Kansas City, payment was refused on account of the failure of the First National at Poteau. The check of the George F. Col-lins Company . and others were forwarded for collection and credit to the appellee, correspondent of the First National at Poteau, on April 21, where it was received and credited to the account of the Potean bank on the morning of April 22,- at a time" prior to the receipt of' information by appellee of said failure. • About one or two o'clock on said date, after the receipt and credit of said check, appellee was officially notified by wire, by the examiner in charge, of the Poteau bank's_ failure, and instructed not to credit or charge any additional items to its account. .Appellee at this time still had said check of the George F; Collins Company in its Possession, indorsed by appellant . and the Poteau bank, and, instead of charging same back to Poteau and returning same to the examiner, it forwarded same to its correspondent in Oklahoma City, who, in turn, sent it to the bank bn which it was drawn in Sapulpa, where payment was refused, tho check protested, account payment Stopped by the drawer - at the request of appellant. Said check . then went ' back the route from whence it came, dishonored, -and finally reached appellee, whereupon it brought suit against the
ARK.] KANSAS CITY SOU..R y . .CO. v. FIRST NAT. 449
BANK Olf FT. SMITH. George . F. Collins Company, as drawer, and appellant as indorser, of the check to recover the amount thereof. The: Collins Company deposited the amount in court, and was discharged. A trial resulted in a verdict-and judgnient against appellant, and it has appealed. The first assignment of error urged for reVersal of this case . is that the court erred in giving appellee's instruction No. 2 over appellant's objection, which instruction is as follows : "If you find that the check which has . been introduced in evidence was indorsed and deliVered by the First National Bank of Poteau, Oklahoma, to plaintiff in due course . of business, and that the Poteau bank received credit therefor on its account with plaintiff, your verdict will be for the plaintiff ; unless you further find that the plaintiff had knowledge of the fact, if it be a fact, that . the said Poteau bank was insolvent at the time the check was deposited by defendant, the Kansas • City Southern Railway Company, and knew that the Poteau bank had perpetrated a fraud on defendant, or that plaintiff had knowledge of such facts as would render the taking of the check an act of bad faith." We agree with appellant that this instruction is erroneous. It will be noticed that it permits a recovery against appellant from the mere fact that it credited the amount of this check to the acconnt of the Poteau bank, provided it had no knowledge of the insolvency of the Poteau bank at the time it acquired the check from appellant. In addition to this, it must have parted with value to the amount of the credit, else it could not be hurt, had lost nothing, and would be in no -position to maintain an action against appellant for the amount of the check. It is true, as was said in Cox Wholesale Grocery Co. v. The National Bank of Pittsburgh; 107 Ark. 601, 156 S. W. 187, that, "when a check is taken to a bank, and the bank receives it and places the amount.to the credit of the customer, the relation of creditor and debtor between them subsists, aild not that of principal
450 KANSAS. CITY Sou. -RV. Co.-v. FIRST NAT: [174
BANK OF FT. SMITk. - and agent ;" but it is also true that, if the Chedk-Which ha:S been 'credited in the depositor's -account is unpaid, the bank has the legal right to charge the amount of it back to.the . depositbr's'account,- where a sufficient Credit still remains to cover- -it. By merely entering credit in the depositoe , s account the bank-has parted with nothing of value. Of course, if the depositor checks out the amount of .his credit in the bank, then the bank ha , s paited with value and becomes a holder in due course for , value .of the instrument. In the case of Little v. Arkansas National Bank, 113 Ark.. 72, 74, , 167 S. W „ . 75; 76, this court said . . " A ' ppellants insist that a . verdict . should haVe .been directed in their ' favor, and, in . suppOrt of this Position, theY cite Cases hOlding ‘ that, when a .bank simply diS, counts , a note . and- credits the amount thereof. to the indoiser's , account without paying to him any value for it, the trapsactiOn does not Constitute the ,bank .a purr cbaser for value , of the note. This appears to be a.cor: rect statement of the law, but this issue doesinot appear to have , been raised in the court . below . and no specific instruction to that effect was-asked." , . While this statement may be obiter as to that .case, it appearOo ni.that : it is a correct statement Of the law, In the cas0 Of Ina. Groe: Co. V. , Pirst .Ndt: Bank, 158 Ala. 1 . 4 1 3 1 '48 So. 344 1 . 1 Bep • 18 .1 .32 Am: St. i t is said: 4 !So long as that relation . (relation •of ; debtor , and creditor), continnes, and -the . deposit is ,not , drawn out, tbe bank . is held subject to the equities of the prior parties,. even though the paper has been taken before maturity und without notice.'' , In City Deposit Bank v. , Green (Ia.); 103 N. W. 96; it is said: . : "`By giving credit to the indorser of the note on his deposit account, the bank, in. .effect, agrees to pay .him that amount of money on demand by check or order, and parts with-nothing of value. When it receives,notiee of defenses to the no . te, it is still-in a situation, provided
ARK.] KANSAS CITY SOU. RI% CO.: V. FIRST NAT. 451
BANK "OF FT. SMITH. the .amount thus credited has remained undrawn by the depositor, to return the note to him, and caneel the credit." . ;.' . • . • In the case of Uniov National Bank v. •Win.sor, 101 Minn. 470, 112 N. W. 999, 119.Am St. Rep. 641; Ann. .Cas: 204, it is 'said: When a bank discounts paper . for a depositor, and gives him credit upon its hookS for the'proceeds of such paper, it is not a bona fide purchaser for value so as to be protected against infirmities in the paper, unless, in addition to the mere fact of crediting the depositor with the proceeds of the paper, some other and valuable consideratiOn passes. Such a transaction simply creates the relatiOn of delAor and creditor between the bank and the depositor, and, so hing as that relation centinues and the deposit is not drawn out, the bank stands in the same position as the original party tO _whom the paper was made payable. By giving credit to the indorsen on his .deposit account the bank, in effect, agrees to pay him that: amount of money, on demand by check; or order, and parts with nothing of value. As long as the amount thus credited. remains undrawn by the depositor; the bank, if it receives notice of the fraud, is still in a position to return the note to the depositor and cancel the credit." In the case at bar appellee had given the Poteau bank credit in its account for this check. On the same date, and shortly after the credit had been ,made, it reCeived notice of the insolvency of the- Poteau :bank, at a time prior to parting with possession of said 'Check. At that time this and 6ther similar checks had increased the Poteati bank's credit balanCe to $1,700. It had the legal right, at that tiMe, to bharge sanie back to said acbount and to return said check ' to the examiner in .charge' Of the Poteau bank. At that time it had notice of the-probable infirmity of the title of the Poteau bank to said paper. It also had the right to forward said check to its correspondent in Oklahoma City to be presented by it to the bank on which it was draWn for collection.
452 KANSAS CITY SOU. RN% CO. V. FIRST NAT. {174 BANK OF FT. SMITH. But, when it was returned to it, protested' for nonpayment, it still had the right to charge the amount thereof back to the account of the Poteau bank, and if, in the meantime, it paid out any checks and charged same to the Poteau bank's account, after knowledge of its insolvency, it did so at its own peril. The above instruction. was therefore erroneous, because it allowed appellee to recover by merely crediting the Poteau bank's account with the amount of the check, without taking into consideration whether it had actually parted with value. Appellee's instruction No. 4 is erroneous for the same reasons that apply to instruction No. 2 just disposed of. We do not set this instruction out, as it embodies the same error as instruction No. 2. Appellee's instruction No. 5 was also erroneous in telling the jury that, if they found from the evidence that appellee credited the amount of the check on indebtedness to it by the Poteau bank and was authorized to do so, they should find for the plaintiff, unless it knew of the insolvency of the Poteau bank at the time. This inStruction is abstract, as there was" no evidence tO support it. Appellee's instruction No. 6 is also assigned as error. It is as follows : "You are instructed that, as a matter -of law, it is presumed that any . person who is the holder of a negotiable instrument indorsed to him, acquired such instrument for value ; and in this case the burden of proof is upon -the defendant, Kansas City Southern Railway Company, to prove by- a preponderance of the evidence that the plaintiff did not pay value -for the check involved in this suit; and in this connection you are instructed that . value, as . used in this instruction, may include a credit on an existing indebtedness, or credit on a mutual account, or an advancement of extension of new credit, or a general credit to indorser's checking account."
'ARK.] KANSAS CITY SOU. RN'. CO. v. FIRST NAT. .453 BANK OF FT. SMITH. This instruction placed the burden of proof on appellant to show that appellee did not pay value for the check. This was error, being contrary to § 7825, C. & M. Digest, which is § 59 of the Negotiable Instrument Law. This section is as follows : "Every holder is deemed prima facie to be a holder in due course ; but, when it is shown that the title of any person who has negotiated the instrument was defective, the burden is on the holder to prove that he or some person under whom he claims acquired the title as holder in due course. But the last mentioned. rule does not apply in favor of a party who became bound on the instrument prior . to the acquisition of such defective title." It is not disputed that, at the time the Poteau bank acquired this check from appellant, it was hopelessly insolvent, and therefore perpetrated a fraud on appellant in accepting the check, knowing at the time that it was insolvent. Therefore, by negotiating the instrument to appellee, its title was defective, which placed the burden on appellee to prove that it acquired the title as holder in due course.. Section 52 of the Negotiable Instrument Law, § 7818, C. & M. Digest, is as follows : "A holder in due course is a holder who has taken the instrument under the following conditions : (1) That it is complete and regular upon its face ; (2) that he became the holder of it before it was overdue, and without notice that it had been previously dishonored, ",f such was the fact; (3) that he took it in good faith a.-A for value; (4) that at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it." Subdivision 3 of this section requires that, in order to be a holder in due course, a person must show "that he took it in good faith and for value." In Huff V. Iowa City State Bank, 134 Ark. 495, 204 S. W. 306, quoting from the syllabus, it is said :
"In an action on a note by a bona fide purchaser thereof for value, it appeared that the note was procured by fraud; held, it thereafter became the duty of the bona fide holder to establish by proof the sum paid for the note before he could recover, which sum would be the measure of his recovery." The last limitation in the above quotation was because of the statute of Iowa to this effect, which was the law of that case. In that case the court quoted from Tabor v. Merchants' Natianal Bank, 48 Ark. 458, 3 S. W. 805, 3 Am. St. Rep. 241, as , follows : " The production of the note and proof that the indorsement was made before maturity raised the presumption that the plaintiff had paid value for the note, that it was an innocent holder, and had acquired it in due course of business ; but, if the proof subsequently offered by the defendant to establish their defense shows that the note, in its inception, was so infected by fraud as to destroy the title of the original holder, the presumption of the payment of value was thereby overcome, and the burden of proof was . shifted to the plaintiff to show that value was given for the note." For the errors indicated the judgment will be reversed, and the cause remanded for a new trial. It is so ordered.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.