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COPY X-6186 : Filed 11/23/28 David S. Lansden, Clerk. For Publication - Green. LOUISVtlitS & NASHVILLE RAILROAD COMPANY V. Davidson Equity* F3BERAL RESHRVZ 3 a H OF ATLANTA. (NASHVILLE! BRAHCH), ET AL. OPINION This s u i t was "brought by the Louisville & Nashville- Railroad Company against the Federal Reserve Bank of Atlanta (Nashville Branch) and the American National Bank of Nashville to recover the amount of three checks on a S p r i n g f i e l d "bank dep o s i t e d "by the Railroad Company with the National Bank and cleared "by that "bank f o r c o l l e c t i o n through the Federal Reserve Bank. The Federal Reserve Bank sent these checks d i r e c t l y to the S p r i n g f i e l d "bank upon which they were drawn f o r payment. The S p r i n g f i e l d "bank was closed "before any remittance was made on account of said checks and was wound up as an insolvent i n s t i t u t i o n . The basis of the s u i t i s the rule of law announced in Winchester Milling Company v. Bank of Winchester, 120 Tenn. 225, and other cases, that a c o l l e c t i n g "bank, taking f o r c o l l e c t i o n checks payable a t a distance, i s g u i l t y of negligence i n sending such checks direct to the bank upon which they are drawn. The chancellor, while conceding that the law had been so declared in Tennessee, was of opinion that the c o l l e c t i n g banks i n t h i s case were absolved by < reason of a r u l e of the Federal Reserve System which authorizes Federal Reserve Banks to forward checks entrusted to them f o r c o l l e c t i o n d i r e c t to the payer bank. Such rule having been made "under authority of an Act of Congress authoriz- 7 W X-6186 ing the Federal Reserve Bank to prescribe r u l e s for the conduct of i t s business, the chancellor thought that said rule had force of a Federal s t a t u t e and superseded the State law. This conclusion has "been sharply challenged in t h i s Court and the power of the Federal Reserve Bank to make a rule with such an e f f e c t has been ably discussed and many a u t h o r i t i e s bearing on the question pressed Upon our a t t e n t i o n . A c a r e f u l analysis of the proof offered, the f a c t s of the record, pre- cludes, or a t l e a s t renders unnecessary an attempt to resolve t h i s controversy.. Regardless of any negligence that might be imputed to the c o l l e c t i n g banks before us, the case of the Railroad Company must f a i l . The American national Bank was a depository of the Louisville & Nashville Railroad Company. Agents of the Railroad Company within a designated t e r r i t o r y were required each day to forward the r e c e i p t s of t h e i r o f f i c e s to the American national Bank f o r deposit. I t was the custom of the agent a t S p r i n g f i e l d to take h i s r e c e i p t s every day to the Peoples Bank at S p r i n g f i e l d and exchange them f o r a c a s h i e r ' s chock drawn on said bank. The c a s h i e r ' s check would then bo sent to the American Bank to bo credited on the Railroad Company's account with t h a t i n s t i t u t i o n . Three such c a s h i e r ' s checks amounting to $3,995.00 are involved in t h i s suit. They were deposited according to custom with the American National Bank and that bank cleared them through the Nashville Branch of the Federal Reserve Bank of Atlanta. No undue delay i s charged against e i t h e r bank i n forwarding the checks to S p r i n g f i e l d . There were three other banks in S p r i n g f i e l d besides the Peoples Bank, and the contention of the Railroad Company i s that the Federal Reserve Bank should have, in the exercise of due care, sent these checks to one of the other banks f o r presentment. I t was the custom of the Federal Reserve Bank a t Nashville to send to each bank in S p r i n g f i e l d daily a l l the checks coming into the hands of the Federal -2- X-618S Reserve Bank drawn on such S p r i n g f i e l d Bank. . -560 . On July 9, 1924, the Federal Reserve Bank sent a cash l e t t e r to the Peoples Bank of S p r i n g f i e l d containing checks amounting to $9,696.26 drawn on the l a t t e r concern. This l e t t e r reached the Springfield hank July 10. the checks here involved. I t contained two of On July 10 a similar l e t t e r containing checks so drawn amounting to $11,944.24 was sent in the same manner. This l e t t e r reached the S p r i n g f i e l d "bank July 11 and contained the other check here involved. Springfield bank remained open up to &nd including July 14. The No remittance was made to the Federal Reserve Bank on account of e i t h e r of the cash l e t t e r s j u s t mentioned. The testimony of a former "bookkeeper of the S p r i n g f i e l d "bank i s offered on "behalf of the Railroad Company in which he points out that the S p r i n g f i e l d hank transacted business as usual on July 10, 11, 12, and 14. July 13 was Sunday, He says that so f a r as he knows a l l checks presented a t the countor of the Springf i e l d bank during these days were duly pa id. The argument f o r the Railroad Company i s that the checks drawn in i t s favor wouELhave been paid had they been sent to another bank f o r c o l l e c t i o n and presented. We are not s a t i s f i e d that t h i s argument i s well founded. In a s u i t f o r damages f o r negligence of a bank i n the c o l l e c t i o n of a check entrusted to i t f o r that purpose, actual damage must be a l l e g s d and proven. Such a s u i t i s to be t r e a t e d a@ an action in assumpsit, sounding damages, for a breach of the bank's-implied contract to use due diligence to c o l l e c t the check, or as an action on the case f o r negligence in respect to the duties imposed by law i n consequence of such bank having received the check f o r c o l l e c t i o n . J e f f e r s o n County Savings Bank v. Hendrix, (Ala.) 1 L. R. A. (N. S.) 246. Speaking of a l i k e s i t u a t i o n , t h i s court said: "The onus was upon the p l a i n t i f f to show negligence of defendant and loss r e s u l t i n g to i t s e l f i n consequence. Having selected an agent for c o l l e c t i n g i t s -3- X-6186' ^ claims, which i t seeks to hold l i a b l e for non-collection, i t mast show that the claim was good and c o l l e c t i b l e . 13 Lea, 114-118." Bruce v. Baxter, 7 Lea, 477; Collier v. Pulliam, Sahlien v. Bank, 90 Tenn., 221, 232* The same conclusion was reached "by the Supreme Court of Alabama upon a caref u l consideration of a u t h o r i t y . J e f f e r s o n County Savings Bank v. Hendrix, supra# See other cases in accord c o l l e c t e d in Mote 1, L. R. A. (IT. S. ) 246* Judge Story s t a t e s the law t h i s way: " I t i s a good excuse that the misconduct of the agent has been followed by no loss or damage whatsoever to the principal; f o r then the r u l e applies that although i t i s a wrong, yet i s without any damage; g,nd to maintain an action both much concur, f o r damnum absque i n j u r i a and i n j u r i a absque general, equal objections to any recovery." are, in Story on agency, 236. In order, t h e r e f o r e , f o r the Railroad Company to hold these c o l l e c t i n g banks f o r the l o s s alleged to have r e s u l t e d from sending the items in question direct to the payer bank, the Railroad Company must show there would have been no such l o s s had these items been sent f o r c o l l e c t i o n to another of the banks in Springfield. Morse on Banks and Banking, (5 Ed. ) Sec. 236a; 3 R. C. L., 628; Givan v. Bank of Alexandria, (Tenn.) 52 S. W., 923; 47 L* R. A., 270. When the cash l e t t e r amounting to $9,696*26, containing two of the checks involved, rcached the S p r i n g f i e l d bank on July 10, there were two similar cash l e t t e r s of e a r l i e r date from the Federal Reserve Bank on the counter of the Springfield bank containing checks on the l a t t e r bank awaiting payment aggregating $56,825*74, On t h i s day i t s books show that the Springfield bank had cash resources, money, cash items and bank balances amounting to $37,271*44. Of t h i s amount, $10,657*11 seems to have been money of the S p r i n g f i e l d bank on deposit with other banks "under contract" and therefore not immediately a v a i l a b l e . So t h a t the t o t a l cash resources of the S p r i n g f i e l d bank, applicable to the payment ef checks, were $26,614.33. So manifestly the S p r i n g f i e l d bank could not have X-6166 paid."the items contained, in the cash l e t t e r which reached S p r i n g f i e l d July 10, no matter how such items were presented, unless said items were given precedence over other items previously presented and e n t i t l e d to p r i o r i t y of payment. On July 11 when the cash l e t t e r from the Federal Reserve Bank with items a mountfng to $11,944.24 and containing the other check here involved reached the S p r i n g f i e l d "bank, the cash resources of the l a t t e r bank, exclusive of the $10,657.11 on deposit under contract, amounted to $32,292.41, There s t i l l r e - mained unpaid on the counter of the Springfield bank, in addition to the $9,696.26 l e t t e r , checks drawn upon i t aggregating $33,482.97, which checks had "been previously presented and were e n t i t l e d to be paid before any of the three checks here involved. So that the items contained in the cash l e t t e r which reached S p r i n g f i e l d on July 11, including the t h i r d item here involved, could not have been paid, however presented to the S p r i n g f i e l d bank, except as the r e s u l t of an unlawful p r e f e r e n c e . There was no time a f t e r the three checks reached S p r i n g f i e l d and up to the closing of the Peoples Bank when there were not checks on the counter a t that bank, presented before any of the Railroad Company's checks, of an aggregate amount exceeding the cash resources of the payer bank. the order in which they are presented. Checks must be paid i n No payee has a r i g h t to demand that h i s check be given p r i o r i t y over a check that came in f o r payment e a r l i e r . Morse on Banks and Banking, Sec. 450, Sec. 354; 7 C. J . 681. When a bundle of checks i s presented through a c l e a r i n g house, a l l must be paid, or none. The payer bank i s not e n t i t l e d to s e l e c t checks f o r payment, if funds to pay a l l are i n s u f f i c i e n t . Morse on Banks and Banking, Sec. 354, A c a s h i e r ' s check i s not an assignment of a fund but only an evidence of indebtedness on the p a r t of the bank. checks of the barikte customers. 440; 53 L. R. A. 232, I t i s not e n t i t l e d to any p r i o r i t y over Clark v. Chicago T i t l e & Trust Co., 186 111. r "* X-6186 No matter, t h e r e f o r e , how the three checks with respect to which suit i s "brought had "been presented, to the Peoples Bank, whether they had come d i r e c t l y or through another "bank a t Springfield, there was not a time while the Peoples Bank remained open that i t had s u f f i c i e n t cash resources to pay these checks a f t e r paying checks previously presented* The Railroad Company could not have expected the Federal Reserve Bank to have handled these c a s h i e r ' s checks separately. The utmost contention must he that the Federal Reserve Bank should have sent a l l the checks accumulated each day on the Peoples Bank to another "bank i n Springfield for c o l l e c t i o n . Had t h i s course been followed and had the cash l e t t e r s from the Federal Reserve Bank, one f o r $9,696.26 and the other for $11,944.24, reaching S p r i n g f i e l d July 10 and July 11, r e s p e c t i v e l y , "been sent to another "bank in that place, the proof wholly f a i l s to show that any such anount of demands could or would have "been paid "by the Peoples Bank upon p r e s e n t a t i o n . must have "been paid in f u l l . payment. As above seen, the items in each l e t t e r P a r t i c u l a r items could not have "been selected for The c o l l e c t i n g "bank in S p r i n g f i e l d would have been without authority to permit p r e f e r e n c e s . There i s no showing that those in charge of the Peoples Bank would have attempted to p r e f e r items presented through a l o c a l bank to items presented by cash l e t t e r from an out of tarn bank and e a r l i e r on the counter. At any r a t e the Railroad Company had no r i g h t to the payment of i t s c a s h i e r ' s checks u n t i l a l l checks drawn on the S p r i n g f i e l d bank and previously presented had been p a i d . Having no r i g h t to p r e f e r e n t i a l payment, there was no c o r r e l a t i v e duty upon any agent to attempt to procure for the Railroad Company such a preference. An agent cannot be held because he f a i l s to procure for h i s p r i n c i p a l something to which the l a t t e r i s not e n t i t l e d . There i s no predicate for actionable n e g l i - gence unless some legal r i g h t i s invaded or l o s t . In r e f e r r i n g to the f i n a n c i a l condition —* 6~ of the Peoples Bank on the days immediately before i t s f a i l u r e , we have discussed i t s resources as though i t s bank balances were r e a l . As a matter of f a c t , these balances were f i c t i t i o u s according to the record, the r e s u l t of k i t i n g operations. Had the Federal Reserve Bank sent i t s checks on the Peoples Bank to another bank in Springfield, reaching S p r i n g f i e l d July 10 and July 11, there was not enough money in the Peoples Bank on e i t h e r day to have paid such checks. made by exchange. Any payment must have been I t i s a bare conjecture to say that any apparent balance of the Peoples Bank in another bank would have stood up u n t i l a d r a f t issued by the Peoples Bank on July 10 or July 11 could have reached i t s correspondent. In t h i s State, when a bank receiving a check for deposit exercises due diligence in the s e l e c t i o n of an intermediate bank f o r the c o l l e c t i o n of the checik; the depository bank discharges i t s duty to i t s customer. The intermediate bank so selected becomes the agent of the customer and if the debt be l o s t by the negligence of t h i s agent so selected, the owner of the paper has a r i g h t of action d i r e c t l y against such agent. Bank v. Cummings, 89 Tenn. 609; Givan v. Bank of Alexandria, supra; Winchester Milling Co. v. Bank of Winchester, supra. Unless, t h e r e f o r e , the choice of the Federal Reserve Bank to make the coll e c t i o n of the checks in question involved negligence on the p a r t of the American national Bank, there seems ter institution. n# basis for a s u i t on t h i s account against the l a t - I t would be too strong a thing to say that a National bank i s g u i l t y of negligence i n clearing through a Federal Reserve bai%, p a r t i c u l a r l y when the testimony of the o f f i c e r s of the national bank showed that such o f f i c e r s were not advised as to the p a r t i c u l a r method employed by the Federal Reserve bank i n making c o l l e c t i o n s . For the reasons s t a t e d the decree of the chancellor must be affirmed# Green, C. J . COPY r
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