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COPY X-6678 i . 0 5 COURT OF APPEALS OF HEW YORK, (254 N.Y. 218) Decided. J u l y 8, 1930. WILLIAM A. CAES OH and Others, a s Trustees i n Bankruptcy of LEONARD S. ZARTMAN and ELLA S. ZAUOMAN, I n d i v i d u a l l y and as Copartners, Doing Business under the Firm Name of G. E. ZARTMAN & COMPANY, Appellants, v. FEDERAL RESERVE BAM of HEW YORE, Respondent. APPEAL from a judgment of the Appellate Division i n the f o u r t h j u d i c i a l department r e v e r s i n g a judgment of the T r i a l Term e n t e r e d on a v e r d i c t of a j u r y i n f a v o r of the p l a i n t i f f s and dismissing the complaint. ARTHUR E. SUTHERLAND f o r a p p e l l a n t s . COLIN McLENNAN f o r respondent. CARDOZO, Ch. J . Trustees i n "bankruptcy a r e seeking to r e c a p t u r e moneys c o l l e c t e d "by the defendant, a Federal Reserve bank, with n o t i c e t h a t a p r e f e r e n c e among c r e d i t o r s might he an e f f e c t of the c o l l e c t i o n . Or. E. Zartman & Company were engaged f o r many y e a r s i n the business of p r i v a t e bankers a t Waterloo, New York. On May 16 and 17, 1927, there came i n t o the p o s s e s s i o n of t h e defendant, the Federal Reserve Bank in the Second Federal Reserve D i s t r i c t , 157 checks drawn on the Zartman bank f o r sums amounting i n the aggregate to $15,271.56. These checks, drawn by Zartman d e p o s i t o r s i n favor of various payees, had been indorsed by the payees t o banks, t h i r t y - s e v e n i n number, members of the Federal Reserve banking system, and by these indorsed and t r a n s m i t t e d to the defendant. The indorsements by the member banks show d i v e r s i t i e s of form, some being simply to the order of the Federal Reserve Bank of New York, some to the order of any bank, banker or t r u s t company, some to the order of any bank or banker, and some to the order of any Federal Reserve bank. Accompanying the checks, when r e c e i v e d by the defendant, were l e t t e r s of r e m i t t a n c e . In t h e s e the member banks gave n o t i c e to the defendant t h a t the checks were i n c l o s e d " f o r c r e d i t , " or, more commonly, f o r " c o l l e c t i o n and c r e d i t , n " c o l l e c t i o n and r e t u r n , " or " c o l l e c t i o n and r e m i t t a n c e . " The defendant pursuant to t h i s mandate caused the checks to be p r e s e n t e d f o r payment to the Zartman bank, the drawee named t h e r e i n . 106 X-6678 —2— In response to t h i s demand, i t received two d r a f t s , one f o r $8,699.25, the o t h e r f o r $6,572.37, drawn by the Zartman bank i n Waterloo upon the American 3xchange I r v i n g Trust Company of New York. These d r a f t s , r e ceived by the defendant on May 18 and 19, were p r e s o r t e d to the t r u s t conpany f o r payment on May 20 and again on May 21. On each p r e s e n t a t i o n payment was r e f u s e d on the ground t h a t the d r a f t s had been drawn by Zartman a g a i n s t u n c o l l e c t e d f u n d s . Thereupon, on May 23, the defenda n t ' s manager went to Waterloo and made demand upon Zartman t h a t the d r a f t s be p a i d i n cash. There i s no occasion to r e c i t e the conversat i o n t h a t ensued. Enough f o r p r e s e n t purposes t h a t what was s a i d might reasonably be found by the t r i o r s of the f a c t s to have been n o t i c e to the manager t h a t Zartman was i n s o l v e n t . A f t e r a delay of a few hours there was p a i d to the defendant in cash the sura of $10,363.93. The following day, May 24, the doors of the Zartman bank were closed f o r business, and have never been reopened. A p e t i t i o n i n bankruptcy, f i l e d on June 27, was followed by an a d j u d i c a t i o n of bankruptcy and the appointment of t r u s t e e s . The t r u s t e e s a r e suing to recover the cash p a i d to the defendant on May 23 a s a voidable p r e f e r e n c e under the p r o v i s i o n s of the Federal s t a t u t e . "To t u r n back a t t h i s p o i n t to s t a t e the d e f e n d a n t ' s use of the proceeds of c o l l e c t i o n s . Uach of the member banks had an account with the defendant, an account exacted by the s t a t u t e (Federal Reserve Act, 38 U. S. S t a t . pp. 251, 270, § 19) a s one of the i n c i d e n t s of membership. These accounts were c r e d i t e d on May 19 and 20 with the amount of the Zartman d r a f t s , i . e . , the d r a f t s drawn on the t r u s t company, which were supposed, when r e c e i v e d by the defendant, to be equivalent to cash. As soon as n o t i c e came t h a t these d r a f t s had been dishonored, the e n t r y was r e v e r s e d . Later, on May 31, the c r e d i t was r e - e s t a b l i s h e d to t h e extent of $10,363.93, the cash payment then i n hand, each of the t h i r t y - s e v e n banks being a l l o t t e d i t s a p p r o p r i a t e share. Before the bankruptcy p e t i t i o n , the banks had withdrawn from t h e i r deposit accounts i n the usual course of busine ss moneys equal to the balances i n t h e i r favor a t the date of the c o n t e s t e d c r e d i t s , though they had a l s o made new d e p o s i t s which kept the d a i l y balances a t a l e v e l nearly uniform. If the f i r s t payments out of the accounts be a p p r o p r i a t e d to the f i r s t r e c e i p t s , a l l moneys c o l l e c t e d from the bankrupts had been r e m i t t e d by the defendant to the t h i r t y - s e v e n member banks, i t s correspondents and d e p o s i t o r s . The t r i a l judge l e f t i t to the j u r y to say whether the c o l l e c t i o n s had been made by the defendant a s agent or as owner. The j u r y found f o r the p l a i n t i f f , thus holding by t h e i r v e r d i c t t h a t the c o l l e c t i o n was as owner. The Appellate Division h e l d a s a matter of law t h a t the c o l l e c t i o n was a s agent, basing i t s holding i n l a r g e degree upon an agreement y e t to be considered between the defendant and i t s members. The c o l l e c t i o n having been made a s agent, the conclusion was thought to follow t h a t the agent was not l i a b l e since i t had s e t t l e d with i t s p r i n c i p a l s b e f o r e the r i g h t of reclamation had been p e r f e c t e d by t h e bankruptcy. We think the defendant was an agent and not an owner i n i t s *-6678 -3r e c e i p t of the Zartman d r a f t s and the s u b s t i t u t e d moneys. How the 157 checks were i n d o r s e d by the payees when d e p o s i t e d with the member banks, the r e c o r d does not t e l l u s . The problem to be solved, however, is: not one a s to the r e l a t i o n between the member banks r n d t h e i r d e p o s i t o r s . I t i s a problem a s to the r e l a t i o n between those banks and the d e f e n d a n t . We assume t h a t the form of t h e indorsements, i f not q u a l i f i e d by a g r e e ment, would have p a s s e d to the defendant such t i t l e , i f any, a s belonged to the i n d o r s e r s (Federal Reserve Bank v. Malloy, 264 U. S. 160, 164; City of Douglas v. F e d e r a l Reserve Bank, 271 IT. S. 489; 2:editable Trust Co. v . Rochling, 275 U. S. 248; H e i n r i c h v . F i r s t Mat. Ban!:," 219 N. Y. 1 ) . An agreement, however, i s i n e x i s t e n c e , t h e terms t h e r e o f p r o s c r i b e d by r e g u l a t i o n s a d o p t e d by t h e F e d e r a l Reserve Board under a u t h o r i t y c o n f e r r e d by the p r o v i s i o n s of t h e s t a t u t e . We must look to t h i s agreement to discover t h e r e l a t i o n between the defendant and i t s members i n the p r o c e s s of c o l l e c t i o n . By the F e d e r a l Reserve Act, as f i r s t e n a c t e d i n 1913, a. r e s e r v e bank was a u t h o r i z e d to c o l l e c t only those checks which were drawn on member banks and which were d e p o s i t e d by a member bank or a n o t h e r r e s e r v e bank or t h e United S t a t e s (Farmers Bank v . Federal Reserve Bank, 262 If.- S. 649, 654). Even then, however, the r e g u l a t i o n s of the Board provided^ " I n h a n d l i n g items f o r member banks, a Federal Reserve Bank w i l l a c t as agent only" ( C i r c u l a r No. 1 of 1916, F e d e r a l Reserve Board Report of 1916, p.153, n o t e ; Federal Reserve B u l l e t i n , May, 1916, p p . 259, 2 6 0 ) . The s t a t u t e was amended i n September, 1916 ( § 13) (39 S t a t . 752), so as t o a u t h o r i z e a r e s e r v e bank to r e c e i v e f o r c o l l e c t i o n from any member checks drawn on non-member banks l o c a t e d i n the d i s t r i c t . The Board renewed i t s o r d e r t h a t the r e l a t i o n should be one of agency ( R e g u l a t i o n J , subd» 7, F e d e r a l Reserve Board, Report of 1916, p . 171). In 1917 t h e s t a t u t e was again amended, t h i s time by a p r o v i s i o n t h a t " s o l e l y f o r the purposes of exchange or of c o l l e c t i o n , " a r e s e r v e bank may r e c e i v e from a non-member bank or t r u s t company checks payable upon p r e s e n t a t i o n , upon c o n d i t i o n t h a t such non-member bank or t r u s t company m a i n t a i n an adequate balance with the r e s e r v e bank of i t s d i s t r i c t (Act of June 21, 1917, ch, 32, § 4; 40 S t a t . 232, 234; c f . 262 U. S. a t p . 655). C o l l e c t i o n s were thus p e r m i s s i b l e both f o r members and f o r non-members. • I n the s e t t i n g of t h i s s t a t u t e , R e g u l a t i o n J ( s e r i e s of 1924) was adopted by t h e Board, and i s now to be c o n s t r u e d . I t r e c i t e s ( i n terms s u b s t a n t i a l l y t h e same a s t h o s e of e a r l i e r r e g u l a t i o n s ) t h a t the Board, " d e s i r i n g to a f f o r d both t o the p u b l i c and to the v a r i o u s banks of the country a d i r e c t , e x p e d i t i o u s and economical system of check c o l l e c t i o n and s e t t l e m e n t of b a l a n c e s , h a s a r r a n g e d to have each F e d e r a l r e s e r v e bank e x e r c i s e the f u n c t i o n s of a c l e a r i n g house and c o l l e c t chocks f o r such of i t s member banks a s d e s i r e to a v a i l themselves of i t s p r i v i l e g e s , " to which i s added a r e c i t a l t h a t l i k e p r i v i l e g e s w i l l be a f f o r d e d to nonjnembor banks and t r u s t companies q u a l i f y i n g i n c e r t a i n ways. I t then proceeds to a statement of the terms and c o n d i t i o n s on which b u s i n e s s may be dene. "The F e d e r a l Reserve Board hereby a u t h o r i z e s the F e d e r a l r e s e r v e ^b&riks to h a n d l e such checks s u b j e c t t o t h e f o l l o w i n g terms and c o n d i t i o n s ; and each member and nonmember c l e a r i n g bank which sends chocks to any X-6678 -4Federal r e s e r v e bank: s h a l l "by such a c t i o n be deemed ( a ) t o a u t h o r i z e the F e d e r a l r e s e r v e "banks t o handle such checks s u b j e c t to the f o l l o w i n g terms and c o n d i t i o n s , (b) to warrant i t s own a u t h o r i t y to give the Fede r a l r e s e r v e banks such a u t h o r i t y , and ( c ) to agree to indemnify any f e d e r a l r e s e r v e bank f o r any l o s s r e s u l t i n g from the f a i l u r e of such sending bank to have such a u t h o r i t y . " Among the terms and c o n d i t i o n s thus p r o s c r i b e d a r e t h e s e : "A Federal r e s e r v e bank w i l l a c t only a s agent of the bank from which i t r e c e i v e s such checks." "A Federal r e servo bank may p r e s e n t such checks f o r payment or send such chocks f o r c o l l e c t i o n d i r e c t to the bank on which they a r e drawn," or forward them "to a n o t h e r a g e n t . " "A F e d e r a l r e s e r v e bank may * * * at- i t s o p t i o n , e i t h e r d i r e c t l y or through an a g e n t , accept * * * frank d r a f t s * * * cas k » " without being l i a b l e f o r any l o s s t h e r e b y r e s u l t i n g . The amount of any check f o r which payment i n a c t u a l l y and f i n a l l y c o l l e c t e d funds i s not r e c e i v e d s h a l l be charged back t o the forwarding bank, r e g a r d l e s s of whether or not t h e check i t s e l f can be r e t u r n e d . " F i n a l l y each F e d e r a l He serve bank may promulgate i t s own r e g u l a t i o n s , not i n c o n s i s t e n t with law o r with t h e r e g u l a t i o n s o f the Board, and such r e g u l a t i o n s s h a l l be b i n d i n g upon member and n o n - m e m b e r banks a vailing of its privileges. P u r s u a n t to t h e a u t h o r i t y thus c o n f e r r e d , the defendant made i t s own r e g u l a t i o n s ( c i r c u l a r Ho. 728, J u l y 1 , 1926), r e a f f i r m i n g the r e g u l a t i o n s adopted by the Board and supplementing them by o t h e r s . One of the supplemental r u l e s p r e s c r i b e s the p e r i o d t h a t s h a l l e l a p s e b e f o r e any c r e d i t s h a l l be allowed, e i t h e r p r o v i s i o n a l or f i n a l , f o r checks s e n t i n by members. C r e d i t may be given a t once i n what i s known a s a deferred, account, not s u b j e c t to be drawn on, but t h e r e i s to be no c r e d i t i n the r e s e r v e account u n t i l "the a p p r o p r i a t e time i n d i c a t e d on e c u r r e n t time schedule has e l a p s e d , " though even upon e n t r y i n t h a t account, " c r e d i t and a v a i l a b i l i t y a r e i n a l l i n s t a n c e s s u b j e c t t o * * * a c t u a l r e c e i p t of payment." The time schedule thus r e f e r r e d t o i s based upon the average m a i l i n g time r e q u i r e d f o r items to reach the paying bank, p l u s the time r e q u i r e d f o r the paying bank to remit to t h e d e f e n d a n t . Another supplemental r u l e g i v e s n o t i c e to member banks and o t h e r s t h a t defendant w i l l handlo chocks as cash items only i n accordance with uniform i n s t r u c t i o n t h e r e i n s e t f o r t h , and t h a t "any c o n t r a r y or s p e c i a l i n s t r u c t i o n s noted on cash l e t t e r s o r a t t a c h e d to checks w i l l be ' d i s r e g a r d e d . " Another yule p r e s c r i b e s the form of the indorsement to be adhered t o by t r a n s m i t t i n g banks, whether members or non-members. The indorsement must be "without r e s t r i c t i o n to the o r d e r of the Federal Reserve Bank of New York or to the order of any bank, banker, or t r u s t company with a l l p r i o r i n dorsements guaranteed.." This form i s necessary, as has been s t a t e d , whether the checks t r a n s m i t t e d to the defendant are from members or non-members though the s t a t u t e i s e x p l i c i t to the e f f e c t t h a t t h e r e s h a l l be no power i n a r e s e r v e bank to handle checks f o r non-members except " s o l e l y f o r the purposes of exchange or of c o l l e c t i o n " (Federal Reserve Bank Act, 6 13, amendment^of 1917, § 4) . P l a i n l y , then, the form of the indorsement was not conceived of as i n v o l v i n g a d e p a r t u r e from the mandate of the s t a t u t e * P l a i n l y , t o o , i t was not conceived of as i n c o n s i s t e n t w i t h t5je r e g u l a t i o n s X-6678^-^9 -5and the c i r c u l a r whereby checks received from any "bank a r e to "be handled by the r e s e r v e "banks i n the capacity of agents only. The same c i r c u l a r and r e g u l a t i o n s t h a t p r e s c r i b e the form of the indorsement e s t a b l i s h the p r a c t i c e and the agreement to r e c e i v e the checks a s agent, and give notice to t r a n s m i t t i n g banks t h a t the terms thus e s t a b l i s h e d s h a l l be exclusive of any o t h e r s . The i n f e r e n c e of ownership t h a t follows i n most cases from an u n q u a l i f i e d indorsement i s one dependent upon i n t e n t i o n . I t may be overborne by agreement to the contrary, whether the evidence of a g r e e ment be d i r e c t or c i r c u m s t a n t i a l (Federal Reserve Bank v. Malloy, supra, a t p . 164). Direct as well as c i r c u m s t a n t i a l i s the evidence b e f o r e u s . The r e g u l a t i o n s of the Board, r e i n f o r c e d by the defendant 4 s c i r c u l a r , and a s s e n t e d to by the t r a n s m i t t i n g banks, a r e equivalent to an express agreement t h a t a s between the defendant and the other banks the r e l a t i o n engendered by the r e c e i p t of u n c o l l e c t e d paper s h a l l be an agency and nothing more. The agreement i s confirmed by "the u n d e r l y i n g purposes and p o l i c i e s of the Federal reserve system" (per CROUCH, J . , i n the court be-low), by the p l a c e of the reserve banks i n the d i s t r i b u t i o n of banking f u n c t i o n s a s conceived and developed by the framers of the s t a t u t e . There i s no token of a purpose to burden clearance and c o l l e c t i o n with the r e s p o n s i b i l i t i e s of ownership. The argument i s made t h a t a d i s t i n c t i o n i s to be drawn between c o l l e c t i o n f o r the member banks and c o l l e c t i o n f o r the use of o t h e r s . The r e g u l a t i o n s and the c i r c u l a r do not express such a d i s t i n c t i o n ; i f i t i s to be made, i t must be i n t e r p o l a t e d by a process of c o n s t r u c t i o n . We are t o l d t h a t what i s s a i d i n the r u l e s a s to the e x i s t e n c e of an agency had i t s o r i g i n i n an attempted a d a p t a t i o n of the s t r u c t u r e of the system to the n e c e s s i t i e s of the new "business made p o s s i b l e i n 1917 through the amendment of the s t a t u t e . T i l l then, c o l l e c t i o n s by a r e s e r v e bank were always f o r the account of member banks, f o r whom i t was a l s o a t l i b e r t y to r e c e i v e checks or moneys f o r d e p o s i t . Since then, t h e r e may a l s o be c o l l e c t i o n s f o r the convenience of non-members. To these and to these only, we a r e t o l d , t h e r e g u l a t i o n and the c i r c u l a r were intended to a p p l y . The h i s t o r y , s t a t u t o r y and. a d m i n i s t r a t i v e , of the Federal Reserve system teaches a d i f f e r e n t l e s s o n . There i s no connection, temporal or causal, between the g e n e s i s of the r u l e that the r e l a t i o n s h a l l be one of agency and the enlargement of the f i e l d of business following the amendment of the s t a t u t e . Long "before t h e r e was power to make c l e a r a n c e s or c o l l e c t i o n s f o r banks not members of the system, there was a l r e a d y a statement i n the r u l e s t h a t i n the handling of checks and d r a f t s when forwarded by members., the r e s e r v e banks were to be deemed to a c t i n the c a p a c i t y of agents only. Amendments of the r u l e s have r e s t r a i n e d r e s p o n s i b i l i t y s t i l l f a r t h e r by adding a p r o v i s i o n t h a t the agency s h a l l be one f o r the forwarding bank, and not f o r any o t h e r , thereby excluding an attempt t o convert i t i n t o an agency f o r the payees of the checks, the o r i g i n a l d e p o s i t o r s (Federal Reserve Bank v . Malloy, supra; City of Douglas v . Federal Reserve Bank, s u p r a ) . From the beginning, however, the r e l a t i o n has been c l a s s i f i e d as agency, not ownership. A c l a s s i f i c a t i o n so e x p l i c i t may not be h e l d to have been X-6678 » 110 n e u t r a l i z e d by the terms of the "cash l e t t e r s , ' * vzith t h e i r varying declar a t i o n s t h a t the checks a r e inclosed f o r " c r e d i t , " or f o r " c o l l e c t i o n and c r e d i t , " or f o r " c o l l e c t i o n and remittance" ( c f . Bank of America v. Way d e l l , 187 N. Y. 115, 120). By express p r o v i s i o n of the defendant 1 s c i r c u l a r the l e t t e r s must "be disregarded i f i n c o n s i s t e n t v;ith the uniform p r a c t i c e e s t a b l i s h e d by the c i r c u l a r and by the r e g u l a t i o n s of the Board behind i t . There and novzhere e l s e , l e a s t of a l l i n a p e r f u n c t o r y notice of remittance embodied i n a p r i n t e d form, the agreement governing the r e l a t i o n has i t s f i n a l and complete expression. If the defendant was an agent i n the r e c e i p t of the Zartman d r a f t s and the s u b s t i t u t e d moneys, the ques-tion must s t i l l be met whether i t s l i a b i l i t y was enlarged by any of i t s a c t s t h e r e a f t e r . We must say whether the agent became s u b j e c t to the l i a b i l i t y of an owner when i n s t e a d of r e m i t t i n g the proceeds of c o l l e c t i o n d i r e c t l y to i t s p r i n c i p a l s , i t p u t the proceeds to t h e i r c r e d i t i n an o r d i n a r y deposit account, thereby t u r n i n g the r e l a t i o n from one of agency i n t o one of c r e d i t o r and debtor. I n e f f e c t , the s i t u a t i o n was then the same a s i f the defendant, r e c e i v i n g the money i n the capacity of agent, had handed i t over to the p r i n c i p a l s , and had r e c e i v e d i t back a t once to be r e t a i n e d a s a deposit (Commercial Bank of Penn. v. Armstrong, 148 U. S. 50, 58, 59; Marine Bank v» F u l t o n Bank, 3 Wall. (U.S.) 252: E v a n s v i l l e Bank v. German American Bank, 155 U. S. 556; National B. & D. Bank v. Hubbell, 117 N. Y. 384, 396; Langley v. Warner, 3 N. Y# 327, 329). We think t h e new r e l a t i o n did not take from the defendant the p r o t e c t i o n of the r u l e t h a t money p a i d to an agent, and l a w f u l l y accepted, may not t h e r e a f t e r be reclaimed by one who has made the payment with n o t i c e of the agency, i f b e f o r e the attempted reclamation the agent i n good f a i t h has s e t t l e d with the p r i n c i p a l (National Park Bank v. Seaboard Bank, 114 IT. Y. 28; National City Bank v . Westcott, 118 N. Ye 468, 473, 474; Hooper v . Robinson, 98 U. S. 528; Buller v. Harrison, 1 Cowper, 565). True, indeed, i t i s t h a t the settlement s u f f i c i e n t to c a l l t h i s p r e c e p t into play must be a c t u a l and not construct i v e ( B u l l e r v. Harrison, supra: Mowatt v. McLelan, 1 Wend. 173, 178; La Farge v . Knee land. 7 Cow. 456, 460). If a l l t h a t t h e agent has done i s to agree with the p r i n c i p a l t h a t the fund, s t i l l i n t a c t , s h a l l be h e l d t h e r e a f t e r a s a debtor, he i s not s u b j e c t e d to any l o s s i f d i r e c t e d to make r e s t i t u t i o n out of the moneys thus r e t a i n e d ( c f . La Far go v. Kne eland and Mowatt v. McLelan, s u p r a ) . On the other hand, when once the f u n d has been d e p l e t e d by payment of the debt, the s i t u a t i o n becomes the same as i f the payment to the p r i n c i p a l had been made a t the beginning. The agent i s no b e t t e r , o f f by reason of the new r e l a t i o n , but even if no b e t t e r , he i s e q u a l l y no worse. As t o t h i s aspect of the case, the r u l i n g i n National Park Bank v. Seaboard Bank (supra) i s a precedent so nearly i d e n t i c a l t h a t i t must be accepted as d e c i s i v e . There the Seaboard Bank r e c e i v e d a check f o r c o l l e c t i o n as agent f o r the Eldred Bank and upon r e c e i p t of t h e proceeds gave n o t i c e to i t s p r i n c i p a l i n accordance with a course of dealing t h a t the proceeds had been c r e d i t e d i n an account c u r r e n t between them on which d r a f t s from time to time were drawn as on an ordinary account between a bank and a d e p o s i t o r . There can be no question t h a t the c o l l e c t i n g bank, X-6678 • • * 4 -7- : 111 a f t e r the giving of t h i s notice, was at l i b e r t y to use the proceeds with a l l the freedom of an owner, discharged of any duty to remit i n specie to the principal ( c f . Commercial Bank of Penn. v. Armstrong, supra; Marine Bank v. Fulton Bank, supra). Even so, the ruling was that i t could no longer "be held to r e s t i t u t i o n at the s u i t of the drawee bank a f t e r the drafts on the account current had exhausted the credit balance e x i s t i n g at the time of the c o l l e c t i o n . To determine whether the balance had been used up, the court applied the rule i n Clayton's Case (1 Meriv. 572, 604, 608) whereby "the successive payments and credits" are to be appropriated "in discharge of the items of debt antecedently due in the order of time i n which they stand in the account," the f i r s t payments out extinguishing the f i r s t payments in. There are many other cases, State and Federal, enforcing a l i k e rule (Allon v. Culver, 3 Denio, 284, 293; Thompson v. St. Nicholas Hat. Bank, 113 N. Y. 325, 333; Delaware Dredging Co. v. Tucker Co., 25 Fed. Rep. (2d) 44, 46; Cory Bros. & Co. v . Ownors of S. S. Mecca, 1897 A. C. 286, 288; Deeloy v. Lloyd's Bank, l t d . , 1912 A. C. 756, 783; Matter of Stenning, (1895) 2 Ch. 433). We have no thought to suggest that t h i s or any other formula as to the application of payments to the items of an account i s of such i n f l e x i b l e v a l i d i t y as to admit of no exceptions. Whatever rule i s framed w i l l be subordinated to the broader principle that an application, usually appropriate, may be varied by the court when variance i s necessary to promote the ends of j u s t i c e (Korbly v. Springfield Inst, for Savings, 245 U. S. 330; Lichtenstein v. Grossman Constr. Corp.,- 248 N. Y. 390; Matter of H a l l e t t ' s Estate. 13 Ch. Div. 696; Cunningham v.• Brown, 365 U> S. 1, 12, 13). Hone the l e s s , the formula i s expressive of a rule that must prevail i n the absence of persuasive reasons for q u a l i f i c a t i o n or exception. We cannot f a i r l y say that j u s t i c e w i l l be thwarted i f the rule i s followed here, The p r i n c i p a l s are solvent banks, and the trustees are a t l i b e r t y to pursue the moneys i n their hands (Matter of H i l l Co.. 130 Fed. Rep. 315, 318). At l e a s t , i f there i s any obstacle, there i s nothing i n the record to t e l l us what i t i s . No obvious requirement of p o l i c y or j u s t i c e exacts the suspension or abandonment of an established rule of law to the end that c o l l e c t i o n from an agent may take the place of an e x i s t i n g and s u f f i c i e n t remedy by s u i t against the p r i n c i p a l s . Passing, then, from the question of the application of payments, we come back to the inquiry whether tho immunity of the agent i s l o s t or impaired when the proceeds of the c o l l e c t i o n , instead of being remitted to the principal at once, are retained as a deposit and remitted l a t e r on. What was h e l d on that subject i n the case of the Seaboard Bank has not been modified by anything decided since that time. National B. & D. Bank v..Hubbell (supra), with some analogies on the surface, i s e s s e n t i a l l y d i s s i m i l a r . The f a c t s i n the Hubbell case were these: Checks forwarded for c o l l e c t i o n had been placed when c o l l e c t e d to the credit of a deposit account. Upon the f a i l u r e of the bank, the depositor made claim to the proceeds i n the hands of a receiver as i f subject to a trust, though the entry i n the deposit account had been made with i t s a s s e n t . Tho court held that the claim had been turned into a debt, and that the depositor must come i n and share with the general creditors ( c f . Latzko v. Equitable Trust Co., 275 U. S. 254). The point to be determined was the l i a b i l i t y of X-6678 -8- US an agent to a p r i n c i p a l , of a bank; to i t s correspondent, a f t e r the t e r m i n a t i o n of the agency. Ho question was involved, as to i t s l i a b i l i t y to a t h i r d person, the drawee of the checks, seeking r e s t i t u t i o n a f t e r the agent and the p r i n c i p a l had made a s e t t l e m e n t between themselves. We conclude, as i n the Seaboard case, t h a t the defendant did not enlarge i t s l i a b i l i t y to the r e p r e s e n t a t i v e s of the bankrupts when, a f t e r c o l l e c t i o n was complete, i t transformed i t s r e l a t i o n to the forwarders from agency to debt, l e g a l concepts w i l l not be s t r a i n e d to r e l i e v e an agent of l i a b i l i t y by f o r c e of a s e t t l e m e n t t h a t i s merely formal or c o n s t r u c t i v e , but by the same token they w i l l not be s t r a i n e d a g a i n s t him to charge him with l i a b i l i t y . In a formal or cons t r u c t i v e sense, the defendant, a c t i n g as agent, s e t t l e d with i t s p r i n c i p a l s when by the e n t r i e s i n i t s books i n accordance with the course of d e a l i n g i t gave up the moneys r e c e i v e d by i t a s agent and took thorn back as d e b t o r . Such a settlement w i l l not h a l t the p u r s u i t and r e l i e v o from l i a b i l i t y while the fund i s s t i l l i n t a c t . I t w i l l not open the door to enable the p u r s u i t to be continued when the fund has been d i s b u r s e d . ",7e have s a i d t h a t the money was l a w f u l l y c o l l e c t e d by the agent and was p a i d by the drawee with n o t i c e of the agency. Lawful the c o l l e c t i o n was a t the moment of the making, though the agent i n c o l l e c t ing had cause to b e l i e v e t h a t the e f f e c t of the payment would be a p r e f e r ence among c r e d i t o r s . The s t a t u t e does not say t h a t one who accepts a payment from a debtor b e l i e v e d to be insolvent i s g u i l t y of a f r a u d (Van I d e r s t i n e v . National Discount Co., 227 U. S. 575, 582; Wilson v . Mitchell Woodbury Co., 214 Mass. 514, 519; Grandison v . Robertson, 231 Fed. Hep. 785, 788). A payment so made i s not even voidable t h e r e a f t e r u n l e s s a p e t i t i o n i n bankruptcy follows w i t h i n four months. If t h a t i n t e r v a l e l a p s e s with bankruptcy postponed, the p r e f e r e n c e , however dubious i n i t s making, i s proof a g a i n s t a s s a u l t , 'we may not hold i n such c o n d i t i o n s t h a t the defendant by the mere acceptance of the money was g u i l t y of a wrong, and so chargeable with l i a b i l i t y i f i t did not keep the fund i n t a c t (Mechem on Agency, v o l . 1, § § 1435, 1436). Before r e t u r n became a duty, the money was p a i d o u t . If there was need of notice to the drawee t h a t the d r a f t s were c o l l e c t e d by the defendant as agent and not as owner (Mechem, supra, § 1439; Holt v. Ross, 54 N, Y. 472; National City Bank v. T/estcott, 118 JT. Y. 468, 473; Canal Bank v. Bank of Albany, 1 H i l l , 287; c f . , however, W i l l i s t o n , on Contracts, v o l . 3, § 1595, n o t e ) , we think the n o t i c e was imparted by the r e g u l a t i o n s and the c i r c u l a r s , p u b l i c and o f f i c i a l documents, which, l i k e the l i m i t a t i o n s of a corporate c h a r t e r , were to be heeded by the world a t l a r g e . But n o t i c e was unnecessary, i f the defendant was not a c r e d i t o r , f o r the r i g h t to avoid the p r e f e r e n c e i s the c r e a t u r e of the s t a t u t e , and the f a c t , not the s u p p o s i t i o n or fancy of the debtor, must t e l l us when the r i g h t e x i s t s . 17e p a s s then to the f i n a l question, whether w i t h i n the meaning of the Act of Congress a bank c o l l e c t i n g a d r a f t as agent, and not as owner (Matter of H i l l Co., s u p r a ) , i s a c r e d i t o r s u b j e c t to a duty to make 4 £-6678 • -9- : 1 1 3 r e s t i t u t i o n of a p r e f e r e n c e , though there has "been remittance to i t s p r i n c i p a l p r i o r to the 'bankruptcy. There can he no answer without r e c a l l i n g the p r o v i s i o n s of the s t a t u t e . Bankruptcy Act, s e c t i o n 60-b (Jiason's U. S« Code, t i t l e 11, ch. 6, § 96) p r o v i d e s : " I f a "bankrupt s h a l l * * * have made a t r a n s f e r of any of h i s p r o p e r t y , and i f , a t the time of the t r a n s f e r * * * and * * * w i t h i n f o u r months before the f i l i n g of the p e t i t i o n i n bankruptcy * * *, the bankrupt be i n s o l v e n t , and * * * the t r a n s f e r then operate as a p r e f e r e n c e , and the person r e c e i v i n g i t or to be b e n e f i t e d thereby, or h i s agent a c t i n g t h e r e i n , s h a l l then have reasonable cause to b e l i e v e t h a t the enforcement of such * * * t r a n s f e r would e f f e c t a p r e f e r e n c e , i t s h a l l be voidable by the t r u s t e e and he may recover the p r o p e r t y or i t s value from such p e r s o n . " One who a c c e p t s a p r e f e r e n c e not f o r h i s own account b a t as agent f o r a p r i n c i p a l i s not "the person r e c e i v i n g i t or to be b e n e f i t e d thereby." To be sure, the p r i n c i p a l i s chargeable with n o t i c e imparted to the agent as to the f i n a n c i a l condition of t h e debtor and the t e n dency of the payment to e f f e c t a p r e f e r e n c e . To be s u r e , a l s o , the agent may be sued d i r e c t l y i f the t i t l e i s i n h i s name and t h e s u b j e c t of the t r a n s f e r i n t a c t i n h i s p o s s e s s i o n , j u s t as s u i t might be brought i n l i k e c o n d i t i o n s a g a i n s t any other t r u s t e e holding money or other p r o p e r t y the f r u i t s of an unlawful s a l e . The one who r e c e i v e s a p r e f e r ence, however, w i t h i n the meaning of the s t a t u t e , i s the one who i s p r e f e r r e d , and the one who i s p r e f e r r e d i s not the mere custodian or intermediary, but the c r e d i t o r , present or contingent, who r e c e i v e s by v i r t u e of the p r e f e r e n c e an excessive share of the e s t a t e . The s t a t u t e does not i n t e n d , of course, t h a t the f o r a of the t r a n s a c t i o n s h a l l be p e r m i t t e d to obscure r e a l i t i e s . "To c o n s t i t u t e a p r e f e r e n c e , i t i s not necessary t h a t the t r a n s f e r be made d i r e c t l y to the c r e d i t o r . I t may be made to a n o t h e r f o r h i s b e n e f i t " ( n a t i o n a l Bank of Newport v . n a t i o n a l Herkimer County Bank. 235 U. S. 178, 184). This w i l l happen, f o r example, i f bankrupts make a t r a n s f e r of t h e i r a s s e t s to a c r e d i t o r of t h e i r own c r e d i t o r , who i s t h u s p r e f e r r e d to the same extent as i f the t r a n s f e r had been made t o him d i r e c t l y (225 U. S. a t p . 184). There has been no attempt i n the d e c i s i o n s to catalogue forms of b e n e f i t and methods of evasion. No doubt t h e case supposed i s t y p i c a l of o t h e r s . One thread of u n i f o r m i t y may be looked f o r , none the l e s s , among a l l d i v e r s i t i e s of circumstance*• The person t o be charged with l i a b i l i t y , i f he has p a r t e d b e f o r e the bankruptcy with t i t l e and possession, must have been more than a mere c u s t o d i a n , an intermediary or conduit between the bankrupt and the c r e d i t o r . D i r e c t l y or i n d i r e c t l y he must have had a b e n e f i c i a l i n t e r e s t i n the p r e f e r e n c e to be avoided, the t h i n g to be reclaimed. One w i l l f i n d an a p p o s i t e i l l u s t r a t i o n of the e f f e c t and meaning of the s t a t u t e i n the h o l d i n g i n Keystone Warehouse Co. v. Bis s e l l (203 Fed. Rep. 652). • The buyer of f l o u r , i n t e n d i n g to p r e f e r the s e l l e r , made payments to a warehouseman who had n o t i c e of insolvency. The holding was t h a t the warehouseman, who had r e m i t t e d the payments t o t h e s e l l e r , was not chargeable t h e r e a f t e r a t the s u i t of the t r u s t e e s . A p o s s e s s o r y r i g h t or s p e c i a l 114 *•4"* & X-6678 -10- p r o p e r t y having i t s o r i g i n i n the bailment nay have given him capacity to m a i n t a i n a s u i t f o r f l o u r wrongfully withdrawn, but did not turn him into a c r e d i t o r r e c e i v i n g d i r e c t l y or i n d i r e c t l y the b e n e f i t of a p r e f erence. Mercantile Trust Co. v. S c h l a f l y (299 Fed. Hep. 202), much r e l i e d on by the p l a i n t i f f s , i s not a holding to the c o n t r a r y , f o r t h e r e the defendant to be charged, a t r u s t e e under a mortgage, had the moneys i n i t s p o s s e s s i o n , the s u i t being brought b e f o r e d i s t r i b u t i o n among the bondholders (299 Fed. Rep. a t p . 203). True, indeed, i t i s t h a t the phraseology of the s t a t u t e i s inexact and ambiguous. Even so, a court w i l l be c a u t i o u s i n imputing to the lawmakers a purpose to uproot the s e t t l e d p r i n c i p l e s of the common law a s to the e f f e c t of payment to an agent when followed by a s e t t l e m e n t . All t h i s i s the more p l a i n l y t r u e i n view of the a n t i t h e s i s c l e a r l y marked upon the f a c e of the enactment between the r e c i p i e n t s of b e n e f i t , d i r e c t or i n d i r e c t , who a r e the p e r sons to be sued, and t h e i r agents i n the busine ss of the t r a n s f e r , whose l i a b i l i t y , i f i t e x i s t s , i s secondary and i n c i d e n t a l to the l i a b i l i t y of o t h e r s . We f i n d nothing i n c o n s i s t e n t with these views i n Marine Trust Co. v. Lauria (213 App. Div. 64; a f f d . , 244 IT. Y. 577) and Matter of Veler (249 Fed. Rep. 633). A bank t o which a check i s t r a n s f e r r e d by a r e s t r i c t i v e indorsement f o r c o l l e c t i o n only may maintain an a c t i o n on the check i n i t s own name because s e c t i o n 67 of the Negotiable Instruments law (Cons. Laws, ch. 38) says t h a t i t may (Marine Trust Co. v. Lauria, supra; c f . Hays v . Ha.thorn. 74 N. Y. 486; Spencer v. Standard C. & M. Corp.. 237 N. Y. 479). This does not mean t h a t i t i s owner for every purpose; i n deed by the very h y p o t h e s i s i t i s not owner, but c o l l e c t o r . Whether i t i s p r i v i l e g e d i n l i k e circumstances to maintain a p e t i t i o n i n bankruptcy mast be h e l d to be s t i l l u n c e r t a i n . The opinion i n Matter of Veler (supra) deals with a case where t h e r e was more than a mere agency. The a s s i g n e e had a t i t l e a b s o l u t e on i t s f a c e , though the motive of the assignment was to f a c i l i t a t e c o l l e c t i o n f o r the b e n e f i t of a n o t h e r . Motive without more may be i n s u f f i c i e n t to derogate from t i t l e (Sheridan v . Mayor. 68 N. Y. 30; Hays v. Ha thorn, s u p r a ) . But the r i g h t to sue, i f i t e x i s t s , does not mean of n e c e s s i t y t h a t the s u i t o r i s r e c i p r o c a l l y s u b j e c t to a l i a b i l i t y to be sued (Keystone Warehouse 'Co. v. M s s e l T . ' sugraT."We^think the mnsf "be read i n conformity with common-law analogies to exempt an agent or custodian from the duty to account f o r p r o p e r t y or money, the s u b j e c t of a p r e f e r e n c e , i f oefore the coming of bankruptcy he has s e t t l e d v i t h h i s principal. The judgment should be a f f i r m e d v i t h c o s t s . POUND, CRA2I3, LEHMAN, K3LL0G-G, O'BRIEN and HUBBS, J J . , Judgment a f f i r m e d . concur.
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