Opinion
13476
September 21, 1932.
Before FEATHERSTONE, J., Dillon, February, 1930. Reversed.
Suit by D.J. Lee and others against the Marion National Bank and another. From the judgment for plaintiffs, the defendants appeal.
The decree of the Circuit Judge, directed to be reported, is as follows:
DECREEThe above entitled suit was begun in the Court of Common Pleas for Dillon County on or about February 3, 1930, for the purpose of having the funds hereinafter referred to adjudged and determined by the Court to be a special or trust fund for the payment of the checks mentioned hereinafter upon the ground that plaintiffs have a special equity therein under all of the facts and circumstances of the case giving them such right; for the purpose of requiring the bank to account as to said trust or special fund and for such other and further relief as the plaintiffs might be entitled to under the allegations of the complaint.
After the allegations of the incorporation of certain of the plaintiffs and defendant, Marion National Bank, and the appointment of J.H. McLaurin as administrator of the estate of J.N. Hargrove, deceased, it is alleged that during the cotton season for the year 1929, and for several seasons prior thereto, J.N. Hargrove was a cotton buyer at Dillon, South Carolina, operating upon a large scale, doing a considerable amount of his business through The Marion National Bank, and that it was the custom or agreement between the said J.N. Hargrove and the bank, of which custom and agreement plaintiffs had full knowledge, that the said Hargrove was permitted to buy cotton from various customers and producers and give his checks therefor on the said bank, which it was agreed and was accustomed to pay from the proceeds of drafts deposited by the said J.N. Hargrove to the credit of his cotton account in said bank; that the bank was thoroughly familiar with and had full knowledge of this custom and approved and acquiesced in same; that on the 3rd day of January, 1930, the said J.N. Hargrove drew his two checks, one for Four Hundred Twenty-six and 18/100 ($426.18) Dollars, the other for Two Thousand Eighty and 68/100 ($2,080.68) Dollars, in favor of and covering the purchase of twenty-nine (29) bales of cotton from the Carolina Textile Corporation, one in favor of D.J. E.P. Lee in the sum of Sixteen Hundred Fifteen and 61/100 ($1,615.61) Dollars covering twenty (20) bales of cotton, one in favor of H.J. McCutcheon for Four Hundred Eighty-six and 53/100 ($486.53) Dollars covering seven (7) bales of cotton, three in favor of Dillon Agricultural Loan Association totalling Six Hundred Thirty and 93/100 ($630.93) Dollars covering eight (8) bales of cotton, and one in favor of L. Cottingham in the sum of Three Hundred Fifty-five and 58/100 ($355.58) Dollars covering five (5) bales of cotton, all of which checks purported to have been drawn on his cotton account in said bank and to cover said checks the said J.N. Hargrove, at the close of business on the 3rd day of January, 1930, deposited with the said bank his two drafts, one in the sum of Two Thousand Three Hundred Fifty and 24/100 ($2,350.24) Dollars drawn on Joseph Walker Company of Columbia, South Carolina, the other in the sum of Three Thousand One Hundred Fifty-two and 02/100 ($3,152.02) Dollars drawn on Alexander Sprunt Sons of Wilmington, North Carolina, both of which drafts were duly paid and the proceeds actually went into the hands of the said defendant bank; that the said checks were duly presented for payment and payment was refused and they were protested on the ground of insufficient funds to meet same; that the payment of said checks was improperly refused because the proceeds of the drafts were duly collected, and that the plaintiffs have an equity in said funds for the payment of said indebtedness; that notwithstanding said equities the said defendant, Marion National Bank, has attempted to convert the proceeds of the drafts to the payment of past indebtedness due to it by the said Hargrove which the said defendant had no legal or equitable right to do. The answer of the defendant, Marion National Bank, denies that plaintiffs have any equity to the said funds and claim the right to charge the said proceeds to an overdraft and to a past due note of the said Hargrove. The administrator answered, alleging that the death of J.N. Hargrove closed the account and as the funds were not collected until after his death he was entitled to same for pro rata distribution among the creditors as provided by statute. The cause was referred to the master to take the testimony by order of his Honor, Judge Dennis, bearing date of August 14, 1930, and in pursuance of said order references were duly held and all of the testimony offered was taken and reported to this Court. From the testimony so taken I find the following facts:
That for many years the said J.N. Hargrove had been buying cotton on the market at Dillon and at various other points in the State, and among other banks during the season of 1929 did considerable business with the defendant, Marion National Bank. According to the testimony of the officers of the bank, Mr. Hargrove opened his account with the defendant on the 8th day of September, 1928, and it was closed on the 13th day of January, 1930. The bank account which was offered in evidence frequently showed large overdrafts, sometimes running from thirteen to fifteen thousand dollars. All of the checks drawn against the account were marked "cotton account" and signed "J.N. Hargrove, Cotton Account." They were so handled by the bank without any question and the cashier of the bank testified that he knew Mr. Hargrove was accustomed to draw checks on his account in payment of cotton purchased by him and that the bank always paid his checks whether he had the money in the bank with which to pay them or not; that the bank knew Mr. Hargrove's custom of buying cotton from various producers and others and giving checks for the purchase price, and would subsequently deposit cotton drafts to the account and the bank would pay the checks. This custom was also known to plaintiffs and they relied upon it in accepting the checks.
As above set forth, on the 3rd day of January, 1930, the said J.N. Hargrove purchased the various lots of cotton alleged in the complaint and gave his checks therefor on the Marion National Bank. He had deposited in that bank on the 3rd day of January various drafts and checks amounting to Eight Thousand and Eight Hundred Sixty-seven and 33/100 ($8,867.33) Dollars, one of the checks being a personal check of Three Thousand ($3,000.00) Dollars drawn on the South Carolina Savings Bank at Dillon. On the 4th day of January he deposited in the same bank the sum of Five Thousand Four Hundred Ninety-six and 76/100 ($5,496.76) Dollars, the same being made up of the two drafts above referred to and being the proceeds of sale of the cotton purchased from the various plaintiffs, which drafts were actually collected and went into the defendant bank on the 7th day of January, 1930. At the close of business on January 4, 1930, his account at the defendant bank showed a balance of Fourteen Thousand Three Hundred Sixty-four and 09/100 ($14,364.09) Dollars, and on January the 6th a check in favor of the Peoples State Bank of Dillon was paid by the defendant bank and charged to Mr. Hargrove's account in the sum of Ninety-one Hundred and 36/100 ($9,100.36) Dollars, leaving a balance as of January 6th the sum of Five Thousand Two Hundred Sixty-three and 73/100 ($5,263.73) Dollars. One of the checks issued to The Carolina Textile Corporation, those to the other plaintiffs being of like form, was as follows:
"J.N. HARGROVE, "Cotton Account "Dillon, S.C. January 2, 1930."Pay to the order of Carolina Textile Corp. $2,080.68 Two Thousand Eighty and 68/100 Dollars. For their interest in 24 bales cotton. His endorsement to certify unincumbered ownership. This check not good after thirty days from date issued.
"J.N. HARGROVE, "Cotton Account, "By J.M. SPRUNT.
"Marion National Bank, "Marion, S.C."
These checks were duly deposited in various banks and were presented at the defendant bank for payment in the letter of the Federal Reserve Bank of Richmond, Virginia, on the morning of January the 8th and payment was refused on all of them, most of them being protested and all returned on the ground that there was insufficient funds to meet them. On the same date, January 8th, the Three Thousand ($3,000.00) Dollar check above referred to drawn on the South Carolina Savings Bank, having been returned, was charged against the balance of Five Thousand Two Hundred Sixty-three and 73/100 ($5,263.73) Dollars, leaving a balance due on the account of Two Thousand Two Hundred Sixty-three and 73/100 ($2,263.73) Dollars, which on January 13, 1930, was charged out of the account and credited on a past due note due by the said J.N. Hargrove to the defendant bank.
During these transactions and on the 6th day of January, about noon, Mr. J.N. Hargrove had died, his estate being entirely insolvent. The draft drawn on Joseph Walker Company was as follows:
"Marion, S.C. Jan. 3, 1930.
"B-L 29 B-C attached. Pay to the order of Marion National Bank $2,350.24 Twenty-three Hundred Fifty and 24/100 Dollars.
"J.N. HARGROVE.
"Value received and charge to to account of "To Joseph Walker Co., Columbia, S.C."
Attached to said draft was an invoice of twenty-nine (29) bales of cotton and the bill of lading attached also called for the same number of bales with the same numbers as the invoice. The two checks to the Carolina Textile Corporation, from whom the Walker cotton had been purchased, likewise called for twenty-nine bales. The draft on Alexander Sprunt Sons had no bill of lading attached which called for invoice No. 90 which was an invoice of cotton. Under all the facts and circumstances of the case there can be no question but that the defendant bank has received the proceeds of both drafts; that the proceeds represented the sale price of plaintiffs' cotton and that no part of it has been paid out by the bank to third persons, except the sum of Two Hundred Thirty-three and 03/100 ($233.03) Dollars which was paid out as a part of the Ninety-one Hundred ($9,100.00) Dollar check paid on January 6th.
Under these circumstances the first question that arises is: Whose equity to these proceeds is the highest, that of the bank or of the plaintiffs? Plaintiffs have been deprived of their cotton and have received nothing for it and have traced the proceeds into the defendant bank. The bank claims a lien because of a Three Thousand ($3,000.00) Dollar overdraft and a past due note of Twenty-five Hundred ($2,500.00) Dollars, neither of which credits can be said to have been extended on the strength of plaintiffs' drafts. As a general proposition it could hardly be questioned that the equities of the plaintiffs are the highest and unless there is some rule of equity or law defeating plaintiffs' rights they should be adjudged to be entitled to the fund. The general proposition is identical with that in the case of Union Stock Yards National Bank v. Gillespie, 137 U.S. 411, 11 S.Ct., 118, 119, 34 L.Ed. 725, where the Court uses this language: "In respect to the first question, it may be premised that the Gillespies were the owners of certain cattle, which were consigned to the firm of Rappal, Sons Co. for sale; that the proceeds of the sales made by the Rappals were deposited in the bank, and it is for this money that the suit was brought. This general statement compels the equitable conclusion that, as the Gillespies owned the cattle, they ought to have the moneys received from their sale. The right of an owner of property is not limited to the property itself, but extends to everything which is its direct product or proceeds."
The plaintiffs contend that they are entitled to recover upon two theories: First, that the bank having permitted the deceased Hargrove to advertise his account in the Marion National Bank as a cotton account, and having acquiesced in his custom of issuing checks thereon for the payment of cotton, which checks it admittedly paid under all circumstances, that it is estopped to deny that the account was a cotton account; that it will be presumed to have had knowledge that when the drafts were deposited on January the 4th checks would be drawn against them for the payment of the cotton and that hence the bank had knowledge that it was a special fund for that purpose, and it is estopped to deny same.
Second, that under the testimony it is shown that all of the transactions between the said J.N. Hargrove and plaintiffs were and were intended to be cash transactions, the cotton delivered to be paid for in cash, and was paid for by the issuance of checks on the Marion National Bank, and that such being the case the delivery of the cotton was conditional upon the checks being paid and title did not actually pass until such payment, and the proceeds of the said cotton having been traced into the defendant bank, plaintiffs' lien or ownership attached thereto as proceeds of cotton owned by them.
After due consideration of the law and facts of the case I am of the opinion that plaintiffs are entitled to recover on both theories. As to the first proposition, the law seems to be well settled that while as a general proposition where a person deposits money in a bank the relation of debtor and creditor exists, yet if the deposit is in any way special or made under special circumstances of which the bank has knowledge, or in which it acquiesces, or to which it agrees, then such relation does not exist, but the funds must be held and applied to such special purpose. Simmons Hardware Co. v. Bank of Greenwood, 41 S.C. 177, 19 S.E., 502, 507, 44 Am. St. Rep., 700; Central National Bank of Baltimore v. Connecticut Mutual Life Ins. Co., 104 U.S. 54, 26 L.Ed., 693; Overseers of Poor v. Bank of Virginia, 2 Grat. (42 Va.), 544, 44 Am. Dec., 399; Straus v. Tradesmen's National Bank of New York, 122 N.Y., 381, 25 N.E., 372; Smith v. Sanborn State Bank, 147 Iowa, 640, 126 N.W., 779, 30 L.R.A. (N.S.), 517, 140 Am. St. Rep., 339; Union Stock Yards National Bank v. Gillespie, 137 U.S. 411, 11 S.Ct., 118, 34 L.Ed., 725.
As above set forth, the officers of the bank practically admitted that they had knowledge of Mr. Hargrove's custom of doing business and that it acquiesced therein by paying all checks drawn by him on his cotton account, and it seems to me that there is practically no doubt that had not Mr. Hargrove died the checks here in question would have been paid. It is a further logical conclusion that the bank at all times having paid Mr. Hargrove's checks and the plaintiffs having had knowledge of this fact, and having permitted Mr. Hargrove to draw checks on it during the day for the payment of cotton to be covered by drafts at the close of the day's business, there was an implied promise on the part of the bank both to the plaintiffs and to Mr. Hargrove that the same would be paid. The circumstances are very similar to those in the case of Simmons Hardware Co. v. Bank of Greenwood, supra, where the defendant bank permitted Jervey Company to carry two accounts, one a merchandise account and the other a cotton account. They had given the plaintiffs, Simmons Company, a check on the merchandise account, the cotton account being at that time overdrawn, but there being sufficient funds in the merchandise account to meet the check. Payment of the check was refused and the bank attempted to apply the balance on the merchandise account to the cotton account. Judgment was in favor of plaintiffs, the Court saying: "If, as we have seen, the bank received the deposits on the merchandise account under an implied promise to pay the checks of Jervey Co. on that account, as they were presented, then there was an application of that fund to that purpose, and the bank could not afterwards apply the same to any other purpose — certainly, not without the consent of, or previous notice to, Jervey Co. There being testimony to show that it was the long-continued habit of the bank to pay such checks, notwithstanding the constant balances against Jervey Co. on the cotton account, as well as the outstanding past-due notes, it seems to us that the bank could not depart from such long-continued usage and custom without some notice to Jervey Co."
So, in the case of Central National Bank v. Connecticut Mut. Life Insurance Company, supra: "When a bank account is opened in the name of depositor as general agent and it is known to the bank that he is the agent of an insurance company; that conducting its agency is his chief business; that the account was opened to facilitate that business and used as a means of accumulating the premiums on policies collected by him for it and of making payment to it by checks, the bank is chargeable with notice of the equitable rights of the insurance company, although the depositor deposited other moneys in the same account and drew checks upon it for his private use; and the insurance company may enforce by bill in equity its beneficial ownership therein against the bank claiming a lien upon the balance thereof for a debt due to it from the depositor contracted for his individual use."
In the course of its opinion the Court says: "But although the relation between the Bank and its depositor is that merely of debtor and creditor, and the balance due on the account is only a debt, yet the question is always open, to whom in equity does it beneficially belong? If the money deposited belonged to a third person, and was held by the depositor in a fiduciary capacity, its character is not changed by being placed to his credit in his bank account."
So, in the case at bar, if the funds deposited by Mr. Hargrove were the proceeds of cotton owned by the plaintiffs and sold to him and for which they had not been paid so long as the defendant bank can not claim to be a bona fide holder for value, their equity to follow the proceeds can not be questioned. In fact, under the statute law of the State if the cotton or the proceeds had still been in the hands of Mr. Hargrove, plaintiffs could have obtained a lien thereon for the purchase price and the funds having been merely deposited in the bank and it having paid nothing of a value thereof, it seems to me that in equity it should be regarded merely as a depository of the funds of Mr. Hargrove. In the cause of Overseers of Poor v. Bank of Virginia, supra, the agent of the plaintiff, one Langhorne, had obtained a judgment in the sum of Twenty-one Hundred Ten and 59/100 ($2,110.59) Dollars against Cooke in favor of the plaintiffs. He deposited the sum in the Bank of Virginia to his personal account. Shortly thereafter he suddenly died and the bank charged the amount against a past-due note of his. The Overseers claimed the money as a specific and identified proceeds of the claim against Cooke. The administrator of Langhorne claimed the sum as assets of his estate. In deciding the case in favor of the Overseers the Court said:
"The well-settled principles of law entitle a principal, in all cases where he can trace his property, whether it be in the hands of the agent, or of his representatives, or assignees, to reclaim it, unless it has been transferred, bona fide to a purchaser of it, or assignee for value, without notice. In such cases, it is wholly immaterial whether the property be in its original state, or has been converted into money, securities, negotiable instruments or other property. * * *
"The product, or substitute of the original thing, has the nature of the original thing itself imparted to it, as long as it can be ascertained to be such product, or substitute; and the right of the principal thereto ceases only when the means of ascertainment fail; and this is the case when the subject is turned into money, and is mixed and confounded in a general mass of the same description and becomes incapable of being distinguished from the mass of the moneys of the agent. * * *
"The title of the appellants to the credit in the bank necessarily overreaches the claim of the bank to set off against that credit the debt of Langhorne, that credit with the bank having in its creation imparted to the officers of the bank full and distinct notice that it arose from the debt of Cooke's estate to the appellants. On the face of the check collected by the bank, it was for money that Langhorne was to receive as the agent of the appellants. The appropriation of it by Langhorne to the payment of his private debt, would have been a gross breach of trust. * * *"
The case of Shotwell v. Sioux Falls Sav. Bank, 34 S.D., 109, 147 N.W., 288, 290, L.R.A., 1915-A, at page 715 is an especially instructive one. There the plaintiff had delivered to one Stogner a carload of wheat. Stogner shipped it and deposited a draft and bill of lading with the defendant bank. The bank applied a part of the draft in settlement of an overdraft and paid certain checks for the balance. Plaintiff sued to recover that part applied to the overdraft. On trial a verdict was directed for the defendant which was reversed on appeal. The appellate Court says:
"The Courts should not be unmindful of the necessities of business, and we have no fault to find with the rule announced in the Stephens Case, provided that, in applying such rule, Courts will not refuse to shut their eyes to the clear equities of the particular case, and will insist on such rule being subject to that other well-established and most just rule, recognized by this Court in several cases and which is so clearly set forth in Brand Co. v. Williams, 29 Minn., 238, 13 N.W., 42, wherein the Court, through Justice Mitchell, said: `An action for money had and received can be maintained whenever one man has received or obtained the possession of the money of another, which he ought in equity and good conscience to pay over. This proposition is elementary. There need be no privity between the parties, or any promise to pay, other than that which results or is implied from one man's having another's money, which he has no right conscientiously to retain. In such case the equitable principle upon which the action is founded implies the contract and the promise. When the fact is proved that he has the money, if he cannot show a legal or equitable ground for retaining it, the law creates the privity and the promise.' * * *
"We deny that there is any recognized principle of law, or even any reason founded upon that necessity which is said to know no law, that will sustain either the justice or necessity of holding that, when a fund, even though it consists of money, can be fully and clearly traced into the hands of one who has neither paid a valuable consideration therefor nor changed his relation to the person from whom the fund was received so as to give rise to any equitable defense against the * * * true owner of such fund — when one man has money which in equity and good conscience belongs to another — such fund should not be recovered by the equitable owner thereof. * * *
"A deposits in a bank the money of C, making the deposit in his own name. A owes the bank nothing, and the money remains on deposit without being checked out. The authorities agree that C can recover this money from the bank. And why? Because it is a trust fund belonging to C, and in and to which the bank can have no rightful claim as against C. * * * A goes to the bank with C's money, and deposits it at a time when his account * * * is overdrawn. C ascertains where his money has gone, and, before there has been any change of circumstances, except the mere crediting of A's account with the amount deposited, demands the money. Upon what possible rule of equity or why, as a matter of good conscience between C and the bank, or upon what rule of business necessity, should the bank retain this money from C? Absolutely none. The bank had no right, legally or equitably, to be paid out of this or any other fund not belonging to A. It allowed the overdraft relying upon the confidence it had in A, and not in reliance upon any expectation that A would pay such overdraft out of some third party's money. It did not change its position to its detriment."
Applying these principles to the case at bar the Court held that the plaintiff should have been allowed to recover.
In Wilson v. Smith, 3 How., 763, 770, 11 L.Ed., 820, a case wherein plaintiffs had drawn a draft upon their debtor and had sent it to their agent for collection, this agent sent the collection to his own agent, which collected the amount of the draft, and supposing the draft to be the property of the party from whom he received it, which party was indebted to him, he credited him with the amount collected and did not remit same. Having refused to pay plaintiffs the amount collected, plaintiffs brought suit and in holding the plaintiff could recover, the Court said: "Upon this part of the case, as well as upon the question certified, we think the case of the Bank of the Metropolis v. New England Bank [1 How., 234, 11 L.Ed., 115], decisive against the defendant. It appears from the statement that he made no advances, and gave no new credit to St. John on account of this bill. He merely passed it to his credit in account. Now, if St. John had owed him nothing upon the principles we have already stated, the plaintiff would be entitled to recover the money; and we see no reason why he should be barred of his action because St. John was debtor to the defendant, since the case shows that he incurred no new responsibility upon the faith of this bill, and his transactions with St. John remained in all respects the same as they would have been if this bill had never been transmitted to him."
In the Bank of Metropolis case, the same principle was approved, the holding being that a depositary bank could not as against the true owner of the proceeds of an instrument, apply such fund to the account of the depositing bank, which was merely the agent of the owner, but which relation was not known by the depositary which treated the depositing bank as owner, if the depositary had not, by reliance upon such supposed ownership, so changed its position as to raise equities superior to those of the true owner, who by his act placed the depositor in a position to mislead the depositor to his loss. In fact this seems to be the well-established rule. See annotation L.R.A., 1915-A, at page 721.
In Payne Bros. v. Burnett, 151 Tenn., 496, 269 S.W., 27, 35, 39 A.L.R. at page 1137, in which case the testimony showed a custom of the bank to pay checks given in buying poultry from certain customers out of drafts drawn by the purchaser and deposited and where the bank had turned down checks and attempted to apply the proceeds of a draft to past indebtedness, the Court held: "We think it clearly appears by a preponderance of the evidence that there was, at least, an implied, if not an express agreement between the Burnetts and appellant's cashier, J.H. Clayton, which authorized the Burnetts to buy poultry and draw checks in favor of the sellers, including complainants, on appellant for its payment, and then draw drafts on the commission merchants, to whom such poultry was shipped, in favor of Loyd T. Burnett, who would indorse such drafts to appellant, together with the bills of lading, for the * * * poultry, and that appellant would accept these drafts and credit Loyd T. Burnett's account with them as cash, and out of the proceeds of said drafts would pay the checks drawn by Loyd T. Burnett in favor of the sellers of such poultry; that the two checks in question were drawn by T.C. Burnett in the name of his son, Loyd T. Burnett, in favor of complainants pursuant to such an agreement or understanding clearly appears from the proof; and that appellant's cashier, J.H. Clayton, knew, at the time that he applied the proceeds of the draft drawn by Loyd T. Burnett on Frank Hillman Son, to whom said car of poultry had been consigned, to the payment of indebtedness due from Loyd T. Burnett to appellant, that said two checks held by complainants were outstanding and had not been paid. Therefore appellant did not have the right to refuse payment of said checks and apply the proceeds of said drafts to the satisfaction of the indebtedness due it from Burnett; the proof showing that the net proceeds of said car of poultry amounted to approximately $8,000.00. We think the true ground of appellant's liability is that the proceeds of said car of poultry were impressed with a trust in favor of complainants, from whom Burnett had purchased it, and in payment for which he had drawn checks on appellant, pursuant to the agreement or understanding hereinbefore stated."
In Boyle v. Northwestern Nat. Bank, 125 Wis. 498, 103 N.W., 1123, 1126, 104 N.W., 917, 1 L.R.A. (N.S.), 1110, 110 Am. St. Rep., 844, it appeared that one Schwedler was in business as a commission merchant depositing proceeds of sales of grain, etc., in defendant bank. The bank attempted to apply the proceeds of certain grain belonging to plaintiff to what it claimed was a debt of Schwedler. In holding that it could not be done, the Court said: "The question recurs whether, in equity, the money so on deposit should be paid to the owners of the produce from which it was realized, or to the bank, to be applied on its old claim against the grain corporation. It is very evident that whenever Mr. Schwedler sold a carload of grain or flax on commission, and received pay for the same, such proceeds, after deducting commissions, freight, inspection, and other charges, were held by him for the owner of the grain or flax so sold. The contention seems to be that by depositing such proceeds in the bank to the credit of such account the same became mixed with the funds of the bank generally, and that by reason of such mixture it became impossible to trace and identify the particular money so deposited as entering into any specific fund or property so sought to be charged. * * * These cases do not, in our judgment, go to the extent claimed. On the contrary, `the more recent rule in England,' followed in these cases, is that: `If money held by a person in a fiduciary character, though not as trustee, has been paid by him to his account at his bankers, the person for whom he held the money can follow it, and has a charge on the balance in the bankers' hands.'" The Court then quotes from the cases of [ Central] National Bank v. Insurance Company and Union Stock Yard Bank v. Gillespie, both supra, and continues: "Upon the strength of these authorities, and many others which might be cited, it is manifest that the $648.13 standing to the credit of Mr. Schwedler on the books of the bank on the morning of February 10, 1902, was, in equity, the property of the owners of the net produce from which the same was realized, and should be paid to such owners according to their proportionate shares thereof in equity."
In the case of Citizens' Southern Bank v. Fayram (C. C.A.), 21 F.2d, at page 998, Fayram instructed his agent, Watkins, to collect the amount due on a mortgage and turn the proceeds over to one Erwin for reinvestment. Watkins collected the amount and deposited it in the bank to the credit of a company in which he was interested, and he having died the bank attempted to credit the funds against an old note. It was held that this could not be done, the Court saying:
"No new credit was extended after the deposit in question was made. Some checks were honored, as is apparent from the fact that the amount of the deposit was reduced; but the bank did nothing that it would not have done if the deposit had not been made, and so did not change its position to its disadvantage. The decree of the Court * * * is for the balance of the deposit on hand at the time the account was closed.
"Appellee's right to recover against the Watkins Company is clear and undisputed. The question is whether the same right exists to recover the balance of the deposit as against the bank, where the bank, although it had no notice of appellee's equity, had not changed its position in reliance upon the deposit.
"In Fulton National Bank v. Hosier (C.C.A.), 295 F., 611, the same question was presented to this Court, and the bank was held liable. * * * On the merits it follows the case of the Bank of the Metropolis v. New England Bank, supra. * * *" This case "lays down three rules as to the liability of banks to beneficial owners of funds on deposit. Under the first rule, notice to the bank of the trust character of the funds is sufficient to defeat its claim of lien. Under the second rule, if without such notice the bank has changed its position to its injury after the making of the deposit, it is entitled to assert its lien. Under the third rule, if the bank has no such notice, and has not changed its position, it is not entitled to assert its lien. It is only in the absence of notice that the bank can rely upon either the second or the third rule. Under either of these three rules it becomes necessary to determine whether or not there was notice to the bank. If there was, that ends the inquiry, and there is no necessity to go further and determine whether or not the bank has changed its position to its injury."
Reference has been made to the civil statute of the State giving the right to a lien for purchase price. The criminal statute is even stronger and shows plainly the legislative mind. Section 177 of the Criminal Code (1922) provides: "Any person engaged in the business of buying cotton, corn, rice, or such commodities, either on his own account or for others, who shall buy such on sale from a planter, commission merchant, or any other person or persons, for cash, and shall fail or refuse to pay for the same, and shall make way with or dispose of the same before he shall have paid therefor, shall be deemed guilty of fraud and embezzlement, and shall be liable on conviction, to be imprisoned in the penitentiary for a term not less than one year nor more than five years, at the discretion of the Court."
Section 178 is largely the same except it is made specifically to apply to factors.
With this evidence of the legislative mind it ought to be easy for the Court to apply the rule laid down by practically all of the authorities that the seller of the produce who is not paid therefor has a beneficial interest to the proceeds arising therefrom in the hands of one who is not a bona fide holder for value. And further that when the facts and circumstances amount to notice of such beneficial interest or are sufficient to put the holder on inquiry, he cannot claim to be such holder.
This was the view of the Court in the case of Union Stock Yards National Bank v. Gillespie, above referred to, where is held that it is not necessary that the bank have actual notice of the equities of some third person to the deposit, but if the facts and circumstances in the case are sufficient to put the bank on inquiry as to whether or not the depositor is the absolute owner of the funds it is bound to make such inquiry. In that case the bank attempted to charge certain funds to a debt of one of its depositors. The depositor had purchased cattle from the plaintiffs in the case and the deposit was the proceeds from the sale of such cattle. The bank knew that he was such a cattle purchaser, knew the manner in which he conducted his business, had allowed him to continually overdraw for the payment of his purchases, and the Court held that these facts were sufficient notice to the bank that he was not the unqualified owner of the funds, but that the sellers of cattle had an equity therein.
As above suggested, I am convinced from all of the facts and circumstances in this case that the defendant bank had every reason to know that the drafts deposited by the deceased Hargrove on the 4th day of January represented proceeds of cotton purchased from producers or others who had cotton to sell. It had handled thousands of dollars of business for the deceased in this way, always paying his checks whether he had money to pay them or not, and the conclusion seems to me to be inevitable that the bank will not now be allowed after his death to use plaintiff's money in satisfaction of its past due obligations. It is true that a good number of checks paid on this account were not for cotton, the testimony showing that some of them were for general business transactions, but even these were handled on checks purporting to be a cotton account and were so handled by the bank. There is no doubt under the testimony but that the cotton business made up the great bulk of the account and was handled by the depositing of drafts and the payment therefrom of checks issued in settlement of cotton purchases by Mr. Hargrove. It seems to me, therefore, that the bank is estopped to deny that it was a cotton account.
The testimony also shows that the bank held certain securities to the notes against which it charged the balance in the account, and which securities were turned over to Mr. Hargrove in trust to be collected by him and applied on the note, which securities were never collected or accounted for. The bank makes the contention that the plaintiffs should not be allowed to recover here for the reason that Mr. Hargrove misappropriated these securities; that it would be inequitable to permit plaintiffs to recover because of his inequitable conduct. This position would be well taken if Mr. Hargrove were the plaintiff. However, I think it has no application as against the plaintiffs in this case who are seeking to recover the proceeds of their cotton. There is certainly no inequitable conduct proved on their part and they are in a Court of equity with absolutely clean hands. Under these circumstances the contention can not be sustained.
On the second proposition I am equally satisfied that plaintiffs are entitled to recover. It is well settled that in case of sale for cash where payment is made by check the sale is conditional and title does not vest in the purchaser until the check is actually paid. 35 Cyc., 506, as to proceeds, page 510; Nat. Bank v. Baltimore Ohio Ry. Co., 99 Md., 661, 59 A., 134, 105 Am. St. Rep., 326; National Bank v. Chicago, B. N. Ry. Co., 44 Minn., 224, 46 N.W., 342, 560, 9 L.R.A., 263, 20 Am. St. Rep., 566; Hodgson v. Bairett, 33 Ohio St., 63, 31 Am. Rep., 528; Bewley-Darst Coal Co. v. Gin Co., 126 S.C. 225, 119 S.E., 589; Sprague Canning Machinery Co. v. Fuller (C.C.A.), 158 F., 588, 591; Whitwell v. Vincent, 4 Pick. (Mass.), 449, 16 Am. Dec., 356; 48 C.J., 617. See excellent annotations in 31 A.L.R., 578; 54 A.L.R., 526.
This principle seems to be so well established that I do not deem it necessary to quote from the language of the various Courts the reasons therefor. Its application to the case at bar seems to me to be equally clear. The plaintiffs had no intention, nor is there any intimation anywhere in the testimony or otherwise, that any of the sales from plaintiffs to Mr. Hargrove were intended to be on credit. The defendant raises a question as to whether or not the sale from the Carolina Textile Corporation to Mr. Hargrove was an actual sale or return of cotton. The testimony shows conclusively, and it, is not even contradicted, that Mr. Hargrove purchased cotton for the plaintiff, Carolina Textile Corporation, and was paid in cash therefor upon delivery of the cotton and on its delivery the said corporation became the absolute owner of it. It could have sold it or disposed of it in any way that it saw fit without questioning Mr. Hargrove in any manner. When cotton, however, proved to be unsuitable for the use of the mills it usually sold it back to Mr. Hargrove and that was what was done in the case here, and it seems to me that it makes no difference whether Mr. Hargrove was under contract to buy it back or whether he did it merely as an accommodation to the mills, or because he thought it was to his business advantage. When the property was delivered to the mills it became the mills' property and when they sold it back to Mr. Hargrove it became his property. It was a sale both ways.
A question is also raised as to the seven (7) bales of cotton belonging to the plaintiff, McCutcheon. From the testimony it appears that McCutcheon and Hargrove owned certain cotton which McCutcheon sold to one Rogers who gave to McCutcheon a draft on Alexander Sprunt Sons at Wilmington, which draft was by the said McCutcheon transferred to the said J.N. Hargrove, and was by Mr. Hargrove deposited in the defendant bank, being the draft for Thirty-one Hundred Fifty-two and 02/100 ($3,152.02) Dollars above referred to. At the time of the transfer from McCutcheon to Hargrove, Hargrove gave to McCutcheon his personal check on the Marion National Bank for McCutcheon's part of the cotton and the proceeds of McCutcheon's cotton is actually traced into the defendant bank. I am satisfied that under these circumstances if any of the plaintiffs are entitled to recover Mr. McCutcheon is likewise entitled for the owner has not only the right to pursue the goods but has equally the right to pursue their proceeds.
The proceeds having been traced into the defendant bank and the plaintiffs being the equitable owners thereof for the reason that title to the goods had not passed because of the fact that the checks given for the purchase price had not been paid, the question next arises as to whether or not the defendant bank can claim to be the owner of such proceeds as a bona fide purchaser for value without notice. As above stated, the defendant claims the right to such proceeds because it contends that a Three Thousand ($3,000.00) Dollar check drawn by Hargrove on the south Carolina Savings Bank in Dillon and deposited by him in the defendant bank on the 3d day of January, was returned and charged back to the account on the 8th day of January. In the first place, the bank admits that it had full knowledge on that date of plaintiffs' checks because it was on that date that they were received into the bank and protested by its officers. The proceeds arising from this check had been paid out by the bank on the 6th day of January as a part of a Ninety-one Hundred ($9,100.00) Dollar check drawn by Mr. Hargrove in favor of the Peoples State Bank. Its payment on that date was not a consideration for the proceeds of plaintiffs' cotton and had it not been for the accidental deposit of such proceeds in the bank a considerable overdraft would have resulted. The remaining credit of Twenty-two Hundred Sixty-three and 73/100 ($2,263.73) Dollars was charged on January the 13th and applied to a note of Mr. Hargrove due since the October before. It unquestionably appears, therefore, that the defendant's only claim to the proceeds of the said cotton arises from an application thereof to past-due indebtedness, and past-due indebtedness has repeatedly been held in this State to be an insufficient consideration on which one may base a claim to be an innocent holder for value without notice. Pittman v. Raysor, 49 S.C. 469, 27 S.E., 475; Heyward-Williams Co. v. Zeigler, 106 S.C. 430, 91 S.E., 298; Tucker v. Hudgens, 132 S.C. 377, 129 S.E., 77.
Not only is this the law, but it seems to me to be sustained by highly equitable principles as is well illustrated by the case at bar. To permit the defendant bank here to apply the proceeds of plaintiffs' cotton to Mr. Hargrove's indebtedness would be to make them pay the bank's debt and enable the bank to collect a debt out of third parties in favor of Mr. Hargrove, a condition of affairs no Court of equity should countenance. The proposition is sustained by the case of Wright v. Mississippi Valley Trust Company, 144 Mo. App., 640, 129 S.W. 407, 409, where it is held: Where title had not passed as between the original parties to a sale because the check given in payment of the purchase price was dishonored when presented at bank to which the bill of lading for the goods had been assigned prior to the presentation of the check for the purpose of taking care of an overdraft then standing against purchaser is not a bona fide holder for value.
The Court further said: That "the consideration for the transfer of this warehouse receipt to have been a pre-existing debt. The debt was in existence before the transfer was made, and the creation of the debt by the payment of the money on the overdrafts and the transfer of this collateral cannot be held to be contemporaneous, for the reason that the money was not paid under an agreement that this particular collateral should be furnished, and, this being true, the fact that the time which elapsed between the creation of the debt and the transfer of the collateral was short, both occurring on the same day, can make no difference."
In the case of First National Bank v. Griffin Griffin, 31 Okla. 382, 120 P., 595, 49 L.R.A. (N.S.), 1020, the Court held: "That a bank could not claim to be a purchaser for value without notice where it received cotton and placed the value thereof to the buyer's credit, he at the time being overdrawn and hence had no right with knowledge of these facts to refuse to honor a check given by the buyer for the purchase price of the cotton, and hence the seller is entitled to recover."
In re Perpail (C.C.A.), 256 F., 758, it is held that where a buyer of goods pays for the same by check which is not paid, and the buyer subsequently goes into bankruptcy, the seller may re-take the goods or recover the proceeds thereof from the trustee in bankruptcy of the buyer. This notwithstanding the fact that under the law such trustee stands in the position of an execution creditor.
Also authorities under proposition I above.
The bank, however, contends that there was on deposit to the credit of Mr. Hargrove at the time the Ninety-one Hundred ($9,100.00) Dollar check was paid the sum of Eight Thousand Eight Hundred Sixty-seven and 33/100 ($8,867.33) Dollars in addition to the proceeds of the cotton, making a total to his credit of Fourteen Thousand Three Hundred Sixty-four and 09/100 ($14,364.09) Dollars, and that it cannot be determined whether the Three Thousand ($3,000.00) Dollar check was paid from the proceeds of the cotton or from the Eighty-eight Hundred Dollar deposit. This is a practical question with which the Courts on a number of occasions have had to deal, and in order to determine it the principle has been unanimously adopted that where a deposit is made to a general banking account and an equitable or legal claim is made to such deposit, whether or not the bank has actually paid such deposit out upon checks will be determined upon the principle that checks will be assumed to have been paid out of the first moneys deposited in the bank. In other words, under the particular facts and circumstances of the case at bar, the Court will assume that Ninety-one Hundred ($9,100.00) Dollars was paid by the deposit of Eighty-eight Hundred Seventy-three and 33/100 ($8,873.33) Dollars, and the balance on hand, Five Thousand Two Hundred Sixty-three and 73/100 ($5,263.73) Dollars, both in law and at equity will be assumed to be that much remaining from the proceeds of the sale of the cotton. Dreilling v. National Nat. Bank, 43 Kan., 197, 23 P., 94, 19 Am. St. Rep., 126; First Nat. Bank v. McNairy, 122 Minn., 215, 142 N.W., 139, Ann. Cas., 1914-D, 977; Standing Stone National Bank v. Walser, 162 N.C. 53, 77 S.E., 1006; Northfield Nat. Bank v. Arndt, 132 Wis. 383, 112 N.W., 451, 12 L.R.A. (N.S.), 82; annotation 6 A.L.R. at page 262.
While this principle seems not to have been passed upon by the Courts of the State of South Carolina, it appears to me to be the only equitable disposition of the question and I do not hesitate therefore to adopt it.
Having reached the conclusion that the plaintiffs are entitled to the fund, it necessarily follows that the administrator has no interest therein and hence is not entitled to recover. In order, however, that all questions involved in the case may be disposed of in one appeal I hold that the administrator of Hargrove is not entitled to the fund. The bank credited his account with the money prior to his death and it being to his credit before his death, the right to apply it to his past-due note vested during his life and could not be destroyed by his death. The fact that the money on the drafts was not actually received by the bank until after his death could not affect the question. While it may be said that death closed the account and the balance should have been struck as of that date, I do not think that the mere fact that the actual application as a matter of book-keeping was not made until after death can have the effect of depriving the bank of its vested right. If any items in the deposit account had accrued after death they would have gone to the administrator, but the bank had the funds prior to the death of the depositor and was a creditor in possession, and it would be highly inequitable to require it to pay the fund to the administrator and then receive a pro rata on its note. The right to equitable set-off accrued prior to Mr. Hargrove's death and the mere entry on the books charging him with the note after his death could not destroy this right. See 7 Corpus Juris, 661, and authorities cited.
It is therefore ordered, adjudged and decreed that the plaintiffs have judgment against the defendant, Marion National Bank, for the sum of Five Thousand Two Hundred Sixty-three and 73/100 ($5,263.73) Dollars, with interest from the 8th day of January, 1930, at the rate of seven per cent. and that upon the said judgment being paid that the same be prorated among the plaintiffs according to the amount of their respective checks.
Mr. M.C. Woods, for appellant, Marion National Bank, cites: As to resulting trust: 153 S.C. 160; 41 S.C. 177; 34 L.Ed., 724; 26 L.Ed., 693; 140 A.S.R., 339; L.R.A., 1915-A, 715; 39 A.L.R., 1125. As to set-off: 1 F.2d 998; 49 L.R.A. (N.S.), 1020; 3 L.R.A. (N.S.), 517; 140 A.S.R., 339; 159 S.C. 203; 124 S.C. 380. As to bank being estopped to deny that depositors' account was a cotton account: 95 S.C. 106; 139 S.C. 223; 159 S.C. 243; 140 S.C. 398; 150 S.C. 300; 141 S.C. 265; 147 S.C. 27. How deposits are handled by bank: 19 A.S.R., 126; Ann. Cas., 1914-D, 977; 77 S.E., 1006; 12 L.R.A. (N.S.), 82; 6 A.L.R., 267; 67 Minn., 236; 69 N.W., 912; L.R.A. 1915-A, 715; 156 S.C. 397; 145 S.C. 1; 299 F., 115. Right to set-off against administrator: 136 S.C. 516; 7 C.J., 635; 135 S.C. 339.
Mr. N.B. Hargrove, for appellant, J.H. McLaurin, cites: No right of set-off where obligor not alive: 145 S.C. 1; 125 S.W. 219; 8 Mo., 161.
Messrs. W.C. Moore and Gibson Muller, for respondents, cite: As to relation of depositor and bank: 41 S.C. 177; 26 L.Ed., 693; 44 Am. Dec., 399; 122 N.Y., 381; 140 A.S.R., 339; 34 L.Ed., 725; 194 N.W., 204; 54 A.L.R., 526.
September 21, 1932. The opinion of the Court was delivered by
This is an appeal from the decree of Hon. C.C. Featherstone, Circuit Judge. It is a very able document, and if its fundamental findings of fact were borne out by the evidence, its argument and conclusions would be unanswerable, and its citations of authorities and quotations of law apt and convincing. It is a matter in chancery and the evidence is reviewable by this Court.
The Circuit decree is based upon the finding of the Circuit Judge that the account of J.N. Hargrove in the Marion National Bank was a special cotton account, that by agreement or understanding with the bank Hargrove bought cotton for which he gave checks on the defendant bank, and deposited with the bank drafts drawn on parties to whom he shipped the cotton, the proceeds of which drafts were intended to pay for such cotton. The decree further finds that the bank knew of this custom, acquiesced in it, and is bound by it and is estopped to deny it; that the funds so arising are impressed with a special trust in favor of the persons to whom the checks were given for cotton purchased.
J.N. Hargrove was a cotton buyer with headquarters in Dillon, S.C. It seems that he had accounts with the Bank of Dillon and the defendant Marion National Bank of Marion, S.C. It is alleged in the complaint that the 3d day of January, 1930, he purchased certain cotton from Carolina Textile Corporation, from Lee Lee, from H.J. McCutcheon, from Dillon Agricultural Loan Association, and from L. Cottingham, for which he gave to the said respective parties in payment of such cotton, his checks, drawn on his "cotton account." in the defendant Marion National Bank; that in order to meet these checks, in accordance with his custom and agreement with the bank, he deposited with it drafts on Joseph Walker Co. and Alexander Sprunt Sons, in the aggregate of the amount due plaintiffs for the cotton that day purchased of them; that these drafts were paid; that the proceeds of these drafts, "and any other amounts that might be on hand in said bank to the credit of said 'cotton account' of J.N. Hargrove, constituted a trust or special fund, a deposit for the payment of said checks, or the debts due to plaintiffs which were represented thereby."
Special emphasis is given to this allegation because here lies the core of the whole case.
The answer of the bank denies the material allegations of the complaint and denies liability. The defendant J.H. McLaurin, as administrator of J.N. Hargrove, who died January 6, 1930, for answer denies that Hargrove's account in defendant bank was a cotton account and alleges that it was merely a checking account. He claims the deposited funds as against the plaintiffs and the bank.
The Circuit Judge finds that J.N. Hargrove's account in the Marion National Bank was a special "cotton account"; that it was his custom and agreement with the bank to give checks on this "cotton account" for cotton purchased by him and covered the checks by drafts on the persons and firms to whom he shipped the cotton so bought. He further finds that plaintiffs knew of this custom and agreement and dealt with Hargrove in view of it.
He held that the funds in the bank to the credit of J.N. Hargrove were impressed with a special trust in favor of the plaintiffs, and that the administrator of Hargrove was not entitled thereto.
The bank and the administrator appeal.
We repeat that the crucial question in the case is this: Was the account of J.N. Hargrove in Marion National Bank a special cotton account, or was it a general checking account? Upon the finding that it was a special cotton account, Judge Featherstone has written a powerful and learned decree. If his finding were supported by the evidence, there could be no attack upon his conclusions and the applicability of his authorities. It is because we cannot concur in his finding that this was a special cotton account that we are constrained to reverse his decree. It seems to us that it would be a serious menace to the security and stability of banking, financial and commercial business, to establish, upon the strength of evidence of the character advanced in this case, the rule that a special trust grows out of such transaction.
If there be eliminated from the record the evidence that J.N. Hargrove used checks upon which were printed the words "cotton account" and that he gave such checks to the plaintiffs, it would be impossible to find any evidence in support of the contention that his account in Marion National Bank was a special cotton account. But undisputed evidence is that these printed checks were not furnished by the bank, but by Hargrove himself; that the name of no payee bank was printed thereon; they were drawn on the only account he had in the bank; that he used them for all purposes, for cotton purchases, for payment of farm expenses, clothing, supplies, church dues, automobiles, furniture, salaries, and every kind of personal call. It is alleged that the bank knew that he kept this special cotton account; the bank officials testify, categorically, that he kept only a general account upon which he checked in payment of cotton and any and everything else. It is alleged that plaintiffs knew of this special cotton account and dealt with him with it in view. The only one of the plaintiffs who attempts to say that it knew of it was the Carolina Textile Corporation. Its president, Mr. Brown, undertook to say that he knew of the cotton account, but on cross examination it developed that he predicated his conclusion upon the use by Mr. Hargrove of the checks which had printed on them "cotton account."
The overwhelming weight of the evidence is that Hargrove had but one account in the defendant bank; in it he deposited his funds, from whatever source derived, as for instance from his farms, from cotton sold by him, from money borrowed, from checks from others to him, from checks given by him on other banks. On the day these checks were given to plaintiffs, he deposited in the defendant bank the drafts on Joseph Walker Co., and Sprunt Sons for the value of the cotton that day bought by him and shipped to them, and on the same day deposited in the bank four checks on the Bank of Dillon — three of them given to him. by others, apparently, and one for $3,000.00 given by him. All of these items were placed to the credit of Hargrove in his general account, along with the drafts of Walker Co., and Sprunt Sons.
In the face of this evidence, we are unable to concur in the finding that the account was a special cotton account. It follows that this basic finding by the Circuit Judge being incorrect, the decree predicated thereon is incorrect. It is, then, useless to discuss the several phases of the decree and to analyze the authorities which evidence the study and care given the case by the learned Circuit Judge. Conceding, if you please, their correctness in principle, it remains true that they have no applicability here.
If, however, it be held otherwise, still it must be held that the plaintiffs H.J. McCutcheon and Carolina Textile Corporation would not be entitled to participate in such special trust funds.
Mr. McCutcheon testified that he had not sold any cotton to Mr. Hargrove; that he had sold to Mr. Rogers certain cotton for Mr. Hargrove, and along with it had sold seven bales of his own; that Mr. Rogers had given him a check, or a draft, for the whole amount due for both lots of cotton; that he indorsed and delivered this check, or draft, to Hargrove, who gave him in return his check for McCutcheon's share of the Rogers check, and for McCutcheon's commission for making the sale. This check was on a form upon which was printed "cotton account," but it did not go to pay Mr. McCutcheon for any cotton bought of him by Hargrove. How could it then impress Hargrove's account with a special trust for its payment?
The transaction with the Carolina Textile Corporation presents a claim for the application of the doctrine of special trust even more remote than the McCutcheon claim.
This concern had bought from Hargrove a certain lot of cotton, for which they paid him; it proved to be unsatisfactory for their uses; following their custom and agreement with him, they reshipped the cotton to him — the same cotton — and he returned their money to them by his check. How could a special trust in favor of this claimant be impressed upon a fund into which there is an utter absence of proof that one dollar of this money, or the proceeds of the sale of their cotton, went?
Mr. Brown, president of the Carolina Textile Corporation, on cross-examination testified as follows:
"Q. Did you not have an arrangement with Mr. Hargrove whereby you paid him for cotton and later, if you found it did not suit, after an examination, you rejected it and threw it back on him? A. Yes, had an agreement something of that kind."
It is true that this witness undertook to call this a sale by the corporation to Hargrove. It is patent that it was not a sale. When the corporation rejected the cotton the title reverted to Hargrove. They returned it to him; he returned to them, by his check, the money they had paid him for it. Unfortunately for them he died before they collected the check and his estate has proved to be insolvent.
We can find in this transaction nothing which creates a trust in the funds in the defendant bank in Hargrove's account, not a dollar of which has been proved to have derived from this transaction.
The Circuit Judge held that the Marion Bank was not entitled to charge back to the account of Hargrove the item of $3,000.00, which was a check drawn by Hargrove on the Dillon Bank, which he deposited with the Marion Bank and for which it gave him credit on his account, which check was dishonored, and was charged back to Hargrove's account. The Circuit Judge and respondent's counsel speak of this item as an overdraft. That definition is incorrect. It was a dishonored check for which the depositor had had credit in his account. The bank was within its rights when it charged it back. This question has recently been considered by this Court in the case of E.S. Macomber Co. v. Commercial Bank, reported in 166 S.C. 236, 164 S.E., 596.
There it was held, upon the authority, inter alia, of the case of Southern Stove Works v. Converse Sav. Bank, 112 S.C. 230, 100 S.E., 75, 76, that: "When a check or draft is drawn and handed to the bank, the bank credits its customer with that amount. If the draft, check, or item is not * * * paid, the bank has the right to deduct it from the customer's account."
It follows from this holding that since the respondents have no right to recover these funds from the bank, it was in rightful possession of them. It is established law that when checks or drafts are deposited in a bank and the depositor is given credit for the amount, the title to the item passes to the bank.
If the depositor is indebted to the bank, the bank has the right to offset the indebtedness by the deposit — unless there are conditions or agreements attending the deposit which preclude it. None such exist here. Hence the bank had the right to apply the balance of the funds in the account of Hargrove to the past-due note which he owed it.
The judgment of this Court is that the decree appealed from be reversed, that the complaint be dismissed, and the claim of the administrator for the funds be denied.
MR. CHIEF JUSTICE BLEASE and MR. JUSTICE STABLER and MR. CIRCUIT JUDGE S.W.G. SHIPP, ACTING ASSOCIATE JUSTICE, concur.
MR. JUSTICE CARTER dissents.
The petition for rehearing does not seriously contest the statement that the complaint bases the right of the plaintiffs to recover from the bank upon the proposition that Hargrove's account in the bank was a special cotton account which was impressed with a trust in their favor. We are satisfied that there was no special cotton account and hence there was no error in our opinion thereabout.
But petitioners say that they are entitled to recover, not from the estate of Hargrove, the purchaser of their cotton, nor from the persons to whom Hargrove sold it, but from the bank, for the reason that Hargrove drew drafts upon the firms, Walker Co. and Sprunt Sons, to whom he shipped the cotton, the proceeds of which went into his account, in the bank — an account which we have found to be a general, not a special cotton account — that this was a cash transaction, and the title did not pass.
Strictly speaking this issue is not made by the complaint. It first appears as a serious element in the case in the Circuit decree. However, we prefer to consider it.
The principle of law is well settled that title to property, in a cash transaction, where payment is made by check which is dishonored, does not pass to the purchaser. The seller may repossess it if it has not passed into the hands of an innocent purchaser without notice. If it has so passed, he may recover the value of it from the purchaser, or from one who receives it from the purchaser with notice. The Circuit decree goes further than that, and holds that the proceeds of the drafts given by Hargrove upon the firms to whom he shipped the cotton may be followed in the hands of the bank which had cashed the drafts before they were paid by those upon whom they were made, and had placed the cash to the credit of Hargrove in his general account. It goes even further than that; it goes to the extent of holding that if the bank has paid out Hargrove's funds on checks drawn by him, and offset his indebtedness to it by application against his deposits, the plaintiffs may have recourse upon the general funds of the bank.
The Circuit decree cites Section 177, Cr. Code 1922, now Section 1282, Cr. Code 1932, as indicative of "the legislative mind" on this subject of sale of certain agricultural products and farm properties. The title of that section is: "Making Way with Produce before Paid for, Fraud." There is no question of fraud on the part of any one interested in the present transaction. We fail to see how that section applies to this case.
The authorities cited by petitioner's counsel in the argument in the hearing of the appeal in the case of Young v. Harris-Cortner Co. et al., a Tennessee case reported in 152 Tenn., 15, 268 S.W. 125, 54 A.L.R., 516, and cases found in the annotation of that case, were also relied on in the Circuit decree. The main case in Young v. Harris-Cortner Co. turned on a Tennessee statute and is authority for the principle that the seller has an action for the repossession of his property, or he may sue the vendee for the value thereof. This doctrine is recognized in this State, and followed when the facts warrant its application.
An analysis of all the other cases relied on reveals that they are differentiated from our case now under consideration. There is an apparent, but not real, resemblance to our case in that of Lewis v. James McMahan Co., 307 Mo., 552, 271 S.W. 779, cited in 54 A.L.R., 527 (annotation). There the bank was held liable because it had refused to pay the checks and had applied the money to its own debt, although it had full knowledge of the transaction and had then on hand the proceeds of the property sold. In the present case the checks were not presented to the bank until after it had paid Hargrove's check for $9,100.00 and had applied the balance of his account to his past-due note to it. Moreover, there is no evidence that the bank knew that the checks to plaintiff were outstanding. The Circuit decree assumes that the bank knew it because it assumes that the bank knew that that was Hargrove's way of conducting his cotton business. The history of his transactions with this bank, in another town some fifteen or twenty miles away and another bank in the town where Hargrove conducted his business, does not bear out this assumption.
When drafts are accepted by a bank and the amount thereof placed to the credit of the drawer, the drafts become the property of the bank. It is difficult to understand how the proceeds of those drafts could be recovered of the bank upon the doctrine that because Hargrove's checks to the plaintiffs were unpaid the title to the cotton never passed, and as the bank had collected drafts, which Hargrove the purchaser had drawn on the firms to which he consigned the cotton, the bank was responsible to the sellers. This is to make the bank pay twice; it paid for the drafts, now it is sought to make it pay for the cotton.
This is a hard case; one must sympathize with the plaintiffs, and the big hearted Judge who heard this case on circuit sympathized with them acutely. But, however commendable it may be to feel for the losers in such transactions, cases cannot be decided by such considerations.
In the case of Triplett v. City of Columbia, 111 S.C. 7, 96 S.E., 675, 678, 1 A.L.R., 349, Mr. Justice Hydrick said: "Where an individual has suffered injury as the result of a wrong done, natural justice calls for some remedy, and the Courts have ever been alert to provide one; hence the boast of the law, which is often pressed upon the attention of Courts, that for every wrong there is a remedy. But there is another axiom of practical wisdom equally important to be observed — hard cases make bad law. Not infrequently the hardship of a particular case leads to the strained, if not incorrect, application of sound principles to fit the facts, so as to afford a remedy; and, when the same principles are invoked in similar cases, it is discovered that they lead to results that are exceedingly inconvenient, if not so illogical that they cannot be justified on settled principles of legal liability." (Italics added.)
The petition for rehearing is denied.
MR. CHIEF JUSTICE BLEASE and MESSRS. JUSTICES STABLER and BONHAM and MR. CIRCUIT JUDGE S.W.G. SHIPP, ACTING ASSOCIATE JUSTICE, concur.
MR. JUSTICE CARTER: I dissent.
This action by the plaintiffs, suing on behalf of themselves and all other persons in like situation who may come in and share in the costs and expenses of the suit, was commenced in the Court of Common Pleas for Dillon County, February 4, 1930, against the defendants, for the purpose of recovering the amount of certain checks alleged to have been drawn by J. N. Hargrove, deceased, upon Marion National Bank, a defendant herein, which checks the said bank refused to pay. Issues being joined, the case was referred by his Honor, Judge E.C. Dennis, to A.B. Jordan, master, to take the testimony and report the same to the Court. Thereafter, the matter was heard on the testimony taken before the master by his Honor, Judge C.C. Featherstone, at Dillon, S.C. April, 1931. The decree of his Honor, Judge Featherstone, finding in favor of the plaintiffs as against both defendants and in favor of the defendant Marion National Bank, as against the defendant J.H. McLaurin, administrator of the estate of J.N. Hargrove, deceased, was filed May 2, 1931. From this decree both of the defendants have appealed to this Court.
The facts in the case are fully stated in the Circuit Judge's decree, and the law applicable thereto fully discussed. I am satisfied with the conclusion reached in said decree, and fully concur therein.
In my opinion all of the exceptions should be overruled and the decree of the Circuit Judge affirmed.