the time of the transactions between it and | borrow some money. That was in the fall the New York bank, testified respectively as of 1892. I knew that the bank had been disfollows: counting paper long before that and borrowing money before that, and no authority had[139] been asked of the board to do it. I knew that they were borrowing money and rediscounting paper continually. (Butler): Was a pretty regular attendant at the board meetings during the yearat nearly all the meetings. Q. Did Mr. Allis have authority to discount notes for the bank or to rediscount them? 4. Never that I knew of. I knew that when Colonel Roots was president he asked and received authority from the board to make rediscounts, but I do not know that Mr. Allis ever asked, and the board, when I was present-he never was given any authority to make rediscounts for the bank. Q. Did he have authority from the bank to indorse its papers for rediscount? d. No, sir; never that I was aware of. On cross-examination he testified that he did not recollect of Allis asking for authority; that the question never came before the board as to discounts. He knew that there 38]were discounts made, but did not recollect any particular ones, but in case there were he would suppose they were on the authority of the board, given in his absence, but did not remember that the question was brought up at all. Q. There are a couple of statements made by the bank (being the statements heretofore introduced by the plaintiff) of May 17, 1892, and July 12, 1892, to which you as a director certify, which show, one of May 17 shows rediscounts, $16,172.40, and the one of July 12, 1892, shows rediscounts, $81,748.88. Did you sign these? A. I couldn't say without referring to the original reports. Q. These are the published reports, are they not? A. They purport to be the published report, but I do not know anything about it. was one of the directors at that time. Q. That is one of the usual forms of the reports published in the papers, isn't it? A. Yes, sir. Q. You now tell the jury that you do not know anything about the extent of rediscounts made by it? A. No, sir; I cannot remember. Mr. Denney was cashier in 1892, and he supposed that Denney transacted the business as to indorsements and rediscounting, but did not know and did not recollect that Allis did. Did not hear of him indorsing the notes in suit until after the bank failed. (Kupferle): Mr. Allis did not have the power from the board of directors of the bank to indorse its paper for rediscount. Cross-examination: There was nothing said in the board about such power. The question was not brought before the board. The bank during that time rediscounted paper. The cashier generally attended to that. I knew that the bank was discounting paper. I recall once where the president requested of the board that the bank should Redirect: We had eleven or thirteen members of the board of directors; I forget which. Never less than eight or nine. There was seldom a meeting when all were present a majority present. Q. Did they at any time rediscount, or authorize the rediscounting of paper? Did they have that authority? A. No, sir; that was not their business. Q. Theirs was to discount paper for cus tomers of the banks? A. The daily offerings, yes, sir. Did not know of Mr. Allis indorsing the name of the bank upon the paper for the purpose of rediscounting it. Q. Did you, as a member of the board of directors, or otherwise, have any information that Mr. Allis was using the name of the bank upon his, or other people's paper, for accommodation? A. No, sir, I never did. Q. You didn't know he was using the name of the bank on the bank's paper? A. No, sir. Q. You knew he was discounting paper? A. No, sir; it was not his place. Q. Didn't the correspondence there show he was sending the paper for discount all over the country? A. No, sir; I don't know anything about that. Q. Wasn't it your business to know it? Q. You was vice president and one of the directors? A. Yes, sir. I never knew anything about it until the failure of the bank-that he ever used the bank's name." : (Abeles) Not while I was there (at the meetings of the board) was authority given to Allis as president to indorse or rediscount the notes of the bank. I do not think it was ever mentioned. I knew of the bank rediscounting paper, and somebody was[140] transacting that part of the business. I think I inquired of some of the directors who it was, and was told that the authority vested in the cashier. I do not recollect that I inquired of Allis or Denney. (Cohn): Was not a director in 1892was for ten years prior to that time, and Allis was president in 1891, but did not recollect that he had authority from the board to indorse its paper or to rediscount it. Cross-examination: Knew that rediscounting was being done, but supposed it was being done by the cashier-didn't stop to inquire. Redirect: Q. Who was authorized in the bank to perform that duty? A. I understood the cashier. Q. How was he authorized? Q. You are simply giving your legal opinion? d. Well, I understood that was his authority. Other facts are stated in the opinion of the court. Upon filing the record the defendant in error made a motion to dismiss, which was postponed to the consideration of the merits. Mr. Sterling R. Cockrill for plaintiff in error. Messrs. John Fletcher and W. C. Ratcliffe for defendant in error. In this case briefs were also allowed to be submitted in David Armstrong, Receiver of the Fidelity National Bank of Cincinnati, Ohio, Appt., v. Chemical National Bank of New York, No. 279, by Messrs. John W. Herron and Francis F. Oldham for appellant and by Messrs. William Worthington, George H. Yeaman, and George C. Kobbe for appellee. [240] *Mr. Justice McKenna, after making the above statement, delivered the opinion of the court: 1. To sustain the motion to dismiss, it is contended that the jurisdiction of the case depends on diversity of citizenship, and hence that the judgment of the circuit court of appeals is final. But one of the defendants (plaintiff in error), though a citizen of a different state from the plaintiff in the M41]action* (defendant in error), is also a receiver of a national bank appointed by the Comptroller of the Currency and is an officer of the United States, and an action against him is one arising under the laws of the United States. Kennedy v. Gibson, 8 Wall. 498 [19: 476]; Re Chetwood, 165 U. S. 443 [41: 782]; Sonnentheil v. Christian Moerlein Brewing Co. 172 U. S. 401 [ante, 492]. It is however, urged that such appointment was not shown. It was not explicitly alleged, but we think that it sufficiently appeared, and the motion to dismiss is denied. 2. Against the correctness of the action of the circuit court in instructing a verdict for the New York bank, it is urged that the discounting of the notes in controversy was for the personal benefit of Allis, and that the New York bank was charged with notice of it because of the nature of the transaction, the form of the notes and the order of the indorsements, and also because notice was a question of fact to be decided by the jury on the evidence. It is also contended that the receiver was entitled to a judgment on the set-off. We will examine each of the propositions. 1. The argument to sustain this is that the facts detailed constitute borrowing money, and that borrowing is out of the usual course of legitimate banking business; and one who loans must at his peril see that the officer or agent who offers to borrow for a bank has special authority to do so. But is borrowing out of the usual course of legitimate banking business? Banking in much, if not in the greater part of its practice, is in strict sense borrow |ing, and we may well hesitate to condemn it as illegitimate, or regard it as out of the course of regular business, and hence suspicious and questionable. "A bank," says Morse (sec. 2, Banks and Banking), "is an institution usually incorporated with power to issue its promissory notes intended to circulate as money (known as bank notes); or to receive the money of others on general deposit to form a joint fund that shall be used by the institution for its own benefit, for one or more of the purposes of making temporary loans and discounts; of dealing in notes, foreign, and domestic bills of exchange, coin.[142) bullion, credits, and the remission of money; or with both these powers, and with the priv ileges in addition to these basic powers, of receiving special deposits and making collections for the holders of negotiable paper, if the institution sees fit to engage in such business." This defines the functions: what relations are created by them? Manifestly those of debtor and creditor-the bank being as often the one as the other. A banker, Macleod says, is a trader who buys money, or money and debts, by creating other debts, which he does with his creditexchanging for a debt payable in the future one payable on demand. This, he says, is the essential definition of banking. "The first business of a banker is not to lend money to others but to collect money from others." Macleod, Banking, vol. 1, 2d ed. pp. 109, 110. And Gilbart defines a banker to be "a dealer in capital, or more properly a dealer in money. He is an intermediate party between the borrower and the lender. He borrows of one party and lends to another." Gilbart, Banking, vol. 1, p. 2. The very first banking in England was pure borrowing. It consisted in receiving money in exchange for which promissory notes were given payable to bearer on demand, and so essentially was this banking as then understood, that the monopoly given to the Bank of England was secured by prohibiting any partnership of more than six persons "to borrow, owe, or take up any sum or sums of money on their bills or notes pay. able at demand." And it had effect until 1772 (about thirty years), when the monopoly was evaded by the introduction of the deposit system. The relations created are the same as those created by the issue of notes. In both a debt is created-the evidence only is different. In one case it is a credit on the banker's books; in the other his written promise to pay. In the one case he discharges it by paying the orders (checks) of his creditor; in the other by redeeming his promises. These are the only differences. There may be others of advantage and ultimate effect, but with them we are not concerned. But it may be said these views are elementary and do not help to a solution of the[143] question presented by the record, which is not what relation a bank has or what power its officers may be considered as having in its transactions with the general public, but what is its relation and what power its officers may be considered as having in its trans actions with other banks. Indeed, the ques- | the taker from the obligation of inquiry. A power so useful cannot be said to be illegitimate, and declared as a matter of law to be out of the usual course of business, and to charge everybody connected with it with knowledge that it may be in excess of authority. It would seem, if doubtful at all, more like a question of fact, to be resolved in the particular case by the usage of the parties or the usage of communities. It is claimed, however, that Western National Bank v. Armstrong, 152 U. S. 346 [38: 470], establishes the contrary, and decides the proposition contended for by the plaintiff in error. We do not think it does. Some of its language may seem to do so, but it was used in suggestion of a question which might be raised on the facts of the case, without intending to authoritatively decide it. The facts of that case are different from the facts of the pending one, and in response to its citation we might rest on the difference. But plaintiff in error urges the case so earnestly and confidently that we have [144]considered it better to answer the argument on which it is asserted to be based and remove misapprehension of the extent of the decision. 2. Did the form of the notes or the order of indorsements charge the New York bank with inquiry of Allis's authority or with knowledge of his use of them for his personal benefit? It may be conceded that an individual negotiating for the purchase of a bill or note from one having it in possession, and whose name is upon it, must assume that the title of the holder, as well as the liability of all prior parties, is precisely that indicated by the paper itself. These principles are established by West St. Louis Savings Bank v. Shawnee County Bank, 95 U. S. 557 [24: 490]; Central Bank of Brooklyn v. Hammett et al., 50 N. Y. 158; New York Iron Mine v. First Nat. Bank, 39 Mich. 644; Lee v. Smith, 84 Mo. 304 [54 Am. Rep. 101]; Park Hotel Co. v. Fourth National Bank [58 U. S. App. 674], 86 Fed. Rep. 742; Claflin v. Farmers' & C. Bank, 25 N. Y. 293. But it is not meant that circumstances may not explain the notes or me-relieve In the inquiry there is involved the two preceding propositions as questions of fact, or of mixed law and fact. The first-the power of a bank to rediscount its paper-as to what the course of dealing of the contending banks was; the second-the form of the notes and their order of indorsements as notice-whether relieved by the circumstances which attended them and the transaction which preceded them. The evidence shows that it was not only the custom of the defendant bank to rediscount its paper but that it was the[145] custom of the other banks at Little Rock to do so, and the officers of the New York bank testified as follows: This testimony certainly has very comprehensive scope, and there is no contradiction of it. It must be received, at least, as establishing that, as between the contending banks rediscounting paper was in the usual course of their business, and that besides it was the usual course of business in their respective localities. Therefore the discounting of the notes in controversy carried the sanction of such business. It is contended that the notes gave notice of the want of authority to rediscount them because the indorsement of the bank followed that of Allis, and hence showed that the bank was an accommodation indorser, and because the indorsement of the bank was by its president and not by its cashier. The order of indorsements did not necessarily import that the Little Rock bank was an accommodation indorser. The order was a natural one if the notes had been discounted in the regular course of business. It is not contended that a want of power precluded the bank from discounting the notes of its officers. It had been done for one of the directors, and his note was rediscounted by the New York bank. It had an example therefore in the dealings of the parties, and, seen. besides, was neither wrong nor unnatural of it, we have seen, was not unnatural, and if itself. But it was further relieved from the indorsement of other notes was not question, and any challenge in the indorse-shown to be by him, it was not shown not to ments was satisfied by the circumstances. have been by him. The testimony of the ofIt is to be remembered that the discount- ficers of the New York bank was that the ing the notes in controversy was not the only notes were received and discounted in the transaction between the banks. It was one regular course of business, and in no way difof many transactions of the same kind. | ferent from the other notes discounted by it [146]They justified confidence, and it was con- for the Little Rock bank, and that they knew firmed by the manner in which the notes the notes were properly indorsed by one of were presented. It is conceded that the the duly authorized officers of the First Nacashier had the power to rediscount the tional Bank; but as the notes were not in bank's paper, and it was he who solicited their possession, they were unable to state the accommodation on account of which the the name of the officer. The testimony opnotes were sent to the New York bank. The posed to this, if it may be said to be opposed, notes themselves, it is true, were sent by is negative and of no value. Some of the diAllis, but expressly on the part of the bank, rectors testified that Allis did not have the and subsequent correspondence about them power nor did they know of his having inwas conducted with the cashier, as we have dorsed the bank's paper for rediscount. They And there could have been no misun-knew, however, that the bank's paper was rederstanding. The letter of the New York discounting in large amounts, and that bank which the cashier of the Little Rock money was borrowing continually, but they bank answered was specific in the designa- scarcely made an inquiry, and one of them tion of the notes, their sum and the proceeds testified that only in a single instance did of the discount, and returned one of the Allis request the board for power to borrow notes not in controversy to be corrected. money. The instance is not identified, exTo this the cashier replied: cept to say that it was in the fall of 1892. Of whom, in what amount, whether the request was granted or denied, what inquiry was made, what review of the business of the bank was made, there was absolute silence about. They surrendered the business absolutely to the president and cashier, and intrusted the manner of the execution to them. This court said by Mr. Justice Harlan, in Martin v. Webb, 110 U. S. 15 [28: 52]: "Directors cannot, in justice to those who deal with the bank, shut their eyes to what is going on around them. It is their duty to use[148) Notice was therefore brought to him and ordinary diligence in ascertaining the condito the bank of the transaction and almost in- tion of its business, and to exercise reasonevitably of its items. Was he deceived as to able control and supervision of its officers. the notes which had been sent? It is not They have something more to do than from shown nor is it suggested how such deception time to time to elect the officers of the bank was possible, and a presumption of ignorance and to make declaration of dividends. That cannot be entertained. Therefore, if the which they ought by proper diligence to have discounts he wrote about in his letter of the known as to the general course of business in 20th of December were not in pursuance of the bank, they may be presumed to have those he had requested in his letter of No-known in any contest between the corporation vember 25, he ought to have known and ought to have so said. If he had so said, the New York bank could have withdrawn the credit it had given, and Allis's wrong could not have been committed. Dec. 20, 1892. herewith return. We charge your account with $31,871.27 proceeds of $32,500.00 of discounts. Yours very truly, W. C. Denney, Cashier. The strength of these circumstances cannot be resisted. Against them it would be extreme to say that the New York bank was put to further inquiry. Of whom would it have inquired? Not of Allis, the president [147] of the Little Rock *bank, because his authority would have been the subject of inquiry. Then necessarily of the cashier; but from the cashier it had already heard. He began the transaction; he acknowledged its close, accepting the credit which had been created for the bank of which he, according to the argument, was the executive officer. We can discover no negligence on the part of the New York bank. The dealing with the notes in controversy came to it with the sanction of prior dealings with other notes. It was conducted with the same officers. It was no more questionable. The relation of Allis to and those who are justified by the circumstances in dealing with its officers upon the basis of that course of business." Under section 5136, Revised Statutes, it was competent for the directors to empower the president or cashier, or both, to indorse the paper of the bank, and, under the circumstances, the New York bank was justified in assuming that the dealings with it were authorized and executed as authorized. Briggs v. Spaulding, 141 U. S. 132[35: 662]: People's Bank v. Manufacturers' National Bank, 101 U. S. 181 [25: 907]; Davenport v. Stone, 104 Mich. 521; First National Bank of Kalamazoo v. Stone, 106 Mich. 367; Houghton v. The First National Bank of Elkhorn, 26 Wis. 663 [7 Am. Rep. 107]; Thomas v. City National Bank of Hastings, 40 Neb. 501 [24 L. R. A. 263]. 4. Set-off is the discharge or reduction of one demand by an opposite one. That of plaintiff in error was so applied and the amount due on the notes reduced. He was entitled to no other relief. Bcott v. Armstrong, 146 U. S. 499 [36: | 13, 1888, in the district court of the United 1059], does not apply. In that case it was States for the southern district of California held that a debtor of an insolvent national to obtain a decree declaring that certain bank could set off against his indebtedness real and personal property which had been to the bank, which became payable after the seized by a collector of internal revenue was bank's suspension, a claim payable to him forfeited to the United States. before the suspension. And it was further held that the set-off was equitable, and therefore not available in a common-law action. But in this case the plaintiff in error pleaded the set-off. His right to do so was derived from the law of Arkansas, and that law provided: "If the amount set off be equal to the plaintiff's demand, the plaintiff shall recover nothing by his action; if it be less than the plaintiff's demand, he shall 149]have *judgment for the residue only." (Gould's Arkansas Digest of Statutes, 1020.) The law was complied with. It follows that the Circuit Court did not err in instructing the jury to find for the plaintiff (defendant in error), and judgment is affirmed. 1899. N ERROR to the Circuit Court of the See same case below, 43 Fed. Rep. 846. Messrs. Samuel G. Hilborn, and Fred- [149] *Mr. Justice Harlan delivered the opin- This was an information filed November 174 U. S. 59 The information was based upon sections 3257, 3281, 3305, 3453, and 3456 of the Revised Statutes. The property in question once belonged to the Fruitvale Wine & Fruit Company, a corporation of California. The acts that were set forth as constituting the grounds of forfeiture were recommitted, if at all, while[15 that corporation owned the property. Subsequently, June 9, 1888, the property was purchased by Wolters, Helm, Austin, and Coffman at a public sale thereof by the assignee of the company-the consideration, $7,700, being paid in cash to the assignee. They appeared and filed a demurrer to the original information. The demurrer was confessed, and an amended information was filed January 11, 1889. Wolters, Helm, Austin, and Coffman on the 19th day of April, 1889, filed an answer to the amended information, controverting its material allegations. The answer contained "That they these among other averments: [the claimants] have not sufficient information in regard to the several wrongful acts alleged to have been perpetrated by said corporation on which to found a belief; they therefore, on behalf of said corporation, deny all and singular the alleged fraudulent acts charged in said information as having been done and performed by said corporation." On the 21st day of August, 1890, the claimants filed an amendment of their original answer, in which they averred that in December, 1888, W. Moore Young, who was secretary of the Fruitvale Wine & Fruit Company, and one of the owners of the property in question when the acts complained of in the original and amended informatior. were committed, was indicted in the same court, and was convicted and sentenced to jail. The claimants further averred that imprisonment for one year in the county the acts complained of in this case were the same as those relied on by the government in its prosecution against Young, because of the proceedings and judgment The demurrer to the amended answer was overruled by an order entered October 20, 1890, and an exception was taken by the[151; United States to the action of the court. 43 Fed. Rep. 846. On the next day the following decree was entered: "This cause came on regularly for trial before the court, sitting without a jury, a jury trial having been expressly waived in writing, the United 929 |
