
    Dennis H. McBride, Respondent, v. Illinois National Bank, Appellant.
    First Department,
    March 11, 1910.
    
    Principal and agent — banks — receiving negotiable paper for collection — employment of sub-agent — failure to hold indorsers—respective liability of parties — bills and notes — presentment at place of payment — formal protest unnecessary — direction riot to protest — discharge of indorsers — proximate cause.
    Where a bank accepts a negotiable instrument for collection it becomes the agent of the owner for that purpose, and on dishonor must take steps necessary to hold tile indorsers, and it is liable to the owner for damages resulting from its failure to do so.
    Where a bank receiving negotiable paper for collection employs another'bank for that purpose, the second bank becomes the agent, not of the owner, but of the bank from which it receives the paper, and in the absence of ah agreement to the- contrary it is liable to that bank for damages resulting from its failure to fulfill its duties as agent. -•
    Where a bank, having received a promissory note for collection, sends the note to another bank under a contract which limits the obligation of the latter bank to due care in its choice of correspondents, and it in turn transmits the note to another bank for collection, and. the latter in its turn transmits it to another bank with orders not to protest, and the said bank does not present the note for payment at' the bank where it is payable, whereby recourse against the payee is lost and the note cannot be collected owing to the insolvency of the maker, the bank whose obligation was limited to the proper choice of a collecting agent is not liable on the instrument.
    To hold an indorser of a negotiable instrument under the. rule in this State, it must be presented at the time and place where it is made payable. .
    Formal protest by a notary public .is not essential to hold an indorser, being mere proof of presentment and demand at the time and place required by the instrument followed by notice thereof to indorsers.
    Hence, although a note is received by a bank for collection with directions not to protest, it must be presented for payment at maturity at the place named, arid the direction not to protest cannot be deemed the proximate cause of the release of an indorser, but rather the failure of the bank to make due presentment at the place of payment.
    It follows that where a note has been forwarded for collection through a chain of banks, and there is no evidence of any special agreement between the several banks in the chain, .and the last bank receiving it has failed to present it for payment at the place named,- it is responsible for losses resulting from a failure to hold an indorser rather thau a bank through which the paper had been transmitted and which, by error, gave notice that there was to be no protest.
    Appeal by the -defendant, the Illinois National Bank, from a judgment of the Supreme Court in favor" of the plaintiff,- entered in the office of the clerk of the county of New York on -the 21st day of July, 1909, upon the report of a referee to hear and determine.
    
      Delos McCurdy of counsel \_McCur.dy da Yard, attorneys], for the appellant.
    
      George D. Beattys, for the respondent.
    
      
       Temporarily withheld by direction of the court.— [Rep.
    
   Clarke, J.:

This is an action to recover damages for the alleged negligence of the defendant by which the indorser of.á promissory note became relieved of its liability, and, the maker being insolvent, plaintiff’s assignor lost the amount thereof.

On May 10," 1907, the Western Tool Works of Galesburg, Ill., made a four months’ promissory note, due September tenth, to the order of the Goodyear Tire and Rubber Company, of Akron, O., for $6,432.44, payable at the Galesburg National Bank, Galesburg, Ill. Said note was thereafter for value duly indorsed by the said rubber company, and discounted for its benefit by the National City Bank of Akron,' O., which became the owner and holder thereof before maturity. The proceeds of the note were placed to the account of the rubber company and duly checked out. Shortly before maturity the National City Bank of Akron sent said note to its correspondent, the First National Bank of Cleveland, 0., for collection. The First National Bank of Cleveland acknowledged receipt of same in a letter containing the following: “ In receiving and forwarding paper outside of this city, this bank acts only as your agent, using its best efforts in selecting its correspondents, and will assume no responsibility except for its own acts.” ' It was in evidence that an agreement had been made between, the two banks, in 1903 which was still existing, under which the First National Bank agreed to use the same judgment in selecting correspondents to collect the items as they would if the items were their own, and in view of the fact that ,the National City Bank would keep a substantial credit balance with the First National Bank that bank would receive no compensation for its services, and the National City Bank would hold it to no liability other than to use due diligence in selecting first-class bank correspondents.

The First National Bank of Cleveland forwarded the note to the Commercial National Bank of Chicago, 111., said bank forwarded said note to the Illinois National Bank of Peoria, 111., said bank thereupon forwarded the note to the People’s Trust and Savings Bank of Galesburg, 111. The letter of transmittal from the' Illinois National Bank, the defendant, to the People’s Trust and Savings Bank reads: “ Please find enclosed for collection and returns 8463 Western Tool Works $6432.44. Please do not hold this collection for any reason or excuse. Return at once if not paid.” By mistake of a clerk it also contained the words “No Protest.” The clerk of the People’s Trust and Savings Bank of Galesburg testified: “ I was the collection clerk of that bank. * * * On the day before maturity I called up the Western Tool Works and notified them that we held this note for collection and it would be due the following day and that same would be presented-at their office the day of maturity. That was the 10th of September* 1907. I presented this note for payment at the office of the Western Tool Works to the bookkeeper. She took the note to an apartment in the rear that was part of the main office. She brought the note back to me with the information that they would report on this at our bank in the afternoon. I then took the note back to our bank. By closing time I had received no word from the Western Tool Works in regard to the note and I then took it up with the assistant cashier, and he called the firm up with a last demand for payment. I mean the Western Tool Works. Payment was not made and I attached this slip he^'e (indicating) to the note. On the slip 1 marked opposite for explanation why the note was being returned. I marked No attention ’ with just a check mark.” This exhibit reads": “ Beturned unpaid.. Beason checked, if known.” Alongside are a number of items in a column “ Check sent,” “ Has been paid,” “ Will remit,” “ Will write, “ As'- requested,” “ Payment stopped,” “Never pays drafts,” “Not correct,” “ No attention,” “ For signature,” “ For endorsement,” “ Not enough funds,” “Befused,” and this check mark was opposite the words “"No attention.”

The following day, September eleventh, the defendant sent the note back to the Commercial National Bank of Chicago, with a letter reading as follows: “ Beturned reasons, if any given, endorsed Note Galesburg, 6,432.44.” No reasons were indorsed or stated. The defendant sentno other notice in regal'd to this note to any one at that tithe or for several days thereafter. The Commercial.National Bank of Chicago received this letter from the defendant on September twelfth, and on the same day returned .the note to the defendant with the following letter : “We return herewith note for $6,432.44 payable at Galesburg, Illinois. We regret to inform-you that we cannot accept the return of this item in its present condition. It was sent yon subject to protest and should have been protested if not paid at maturity. We will thank you to secure a remittance for this note and advise us at your earliest convenience.”

On the same day the Commercial National Bank of Chicago telegraphed the First National Bank of Cleveland as follows: “ Galesburg number one fifty-eight fifteen returned without protest we forward again.” And on the same day wrote to said First National Bank of Cleveland, “ Referring to your collection ft 15815, a note for $6,432.44, payable at Galesburg, Illinois. Our correspondent has returned this item to us linpaid, stating that parties pay no attention to their notices. We have returned same instructing them to present again and if not paid to protest and return.” The First National Bank of Cleveland received this telegram and letter September thirteenth, and on the same day wrote to the National City Bank of Akron, plaintiff’s assignor, “We are today in receipt of a collect telegram from Commercial National Bank, Chicago, reading as follows: •l' Galesburg number one fifty-eight fifteen returned without protest we forward again.’ On looking into the matter we find it is your No. 5755 on the Western Tool Works, Galesburg, for $6,432.44. We are not at present in receipt of any further information, but will keep you advised when things progress. Up to this time we seem to be out the telegram charges and the item does not seem to have been paid.”

So that on the fourteenth of September the National City Bank of Akron received notice in due course of mail that the note had not been paid. It did not, however, notify the rubber company or demand payment from it as indorser. The defendant received the letter of the Commercial National Bank of Chicago, dated September twelfth, returning the note for protest on September thirteenth, and on the same day sent it back to the People’s Trust and Savings Bank of Galesburg, which received it on September fourteenth, and on that day caused the-same to be presented to the maker, the Western Tool Works, but not at the Galesburg National Bank where the note was payable, and demanded payment, which was refused, and thereupon caused it to be protested and notice of dishonor and protest to be sent to all of the parties whose names appeared on the note, including the plaintiff’s assignor and the original payee and indorser.

The evidence shows that the first notice which the Goodyear Tire and Rubber Company received of the dishonor of this note was on September seventeenth. Because of these facts the rubber company has refused to pay the note, although solvent and financially able to do so, and claims that it cannot be held responsible therefor. It is admitted that the Western Tool Works, the maker of the note, is insolvent and unable to pay. The plaintiff claims that by the mistake and negligence of the defendant in inserting in its letter of transmittal to the People’s Trust and Savings Bank the words “No Protest,” the note was not properly presented and'protested, and that thereby the indorser was relieved of liability and* that it has a right of aetion against the defendant' to recover its damages thereby incurred.

In Montgomery County Bank v. Albany City Bank (7 N. Y. 459) the plaintiff was the owner and holder of a draft which it transmitted for’ collection to the Albany City Bank, which in turn transmitted it to the Bank of the State of New York at New York city. That bank did not present the draft for payment.on the day it was due or give notice of non-payment thereof to the drawers of indorsers, by mean of which neglect plaintiff sustained damages to the amount of the draft. A verdict under the instructions of the court was returned against both of the defendants. The Court of Appeals reversed as to the Bank of the State of New York and dismissed the- complaint as to it, holding: “ When a bank receives from the owner a bill for collection payable either at the place where such bank carries on its business or at some distant place, it thereby becomes the agent of the owner for the collection, and in the discharge of its obligations as such, if the bill has not been accepted, it is bound to present the same for acceptance without' unreasonable delay, as well as to present the same for payment when it becomes payable; and if not accepted when presented for that purpose, or not paid when presented for payment, it must take such steps by ■protest and notice as are necessary to charge the drawer and endorser, or it will 'be liable to its principal, the owner, for the damages which the latter sustains by any neglect to perform such duties, unless there be some agreement to the contrary, express or implied. And if it be necessary Or convenient for the bank to employ some other bank or individual to collect the bill, either at the place ’of its location, or at a distant place, where the bill is payable, and it .does employ another bank or individual, to whom it transmits the bill for that purpose,' the latter on receiving the bill and entering upon the discharge of the trust, becomes the agent of the former bank and not of the owner, and in the absence of aiiy agreement to the contrary is answerable to it for any neglect in the discharge of its duties as agent, whereby the 'former bank sustains any loss or damage. The principle is, that when a trust is confided to an agent, and he whose interest is entrusted is damnified by the neglect of one whom the agent employs in the discharge of the trust, the agent employed shall answer to the person damnified. * * * The New York State Bank was the agent directly guilty of the neglect. That bank was employed to do the service by the plaintiffs agent, The Albany City Bank, as its agent, to which it was alone responsible for its acts and neglects, and for which the latter according to the settled rule, was alone responsible to the-plaintiff, there being no agreement to the contrary; express or implied. The gist of this action is the breach of duty arising out of an employment for hire, considering that breach of duty as tortious negligence, instead of considering the same circumstances as forming a breach of promise, implied from the same consideration of hire. The Bank of the State of New York not having been employed by the plaintiff as its agent, owed it no duty in respect to the draft, and therefore is not liable to the plaintiff for any neglect of duty which it owed to its principal, the Albany City Bank, under its contract with it.”

The rule laid down is still the settled law of the State of New York ( Commercial Bank of Pennsylvania v. Union Bank of New York, 11 N. Y. 203; Ayrault v. Pacific Bank, 47 id. 570; Naser v. First National Bank, 116 id. 492; St. Nicholas Bank v. State National Bank, 128 id. 26; National Revere Bank v. National Bank of Republic, 172 id. 102), and is the 'rule adopted by the Supreme Court of the United States. (Exchange National Bank v. Third National Bank, 112 U. S. 276.)

It having been established by the evidence that there was a special arrangement or agreement between the Akron National Bank and the First National Bank of Cleveland, under which the obligation of the Cleveland bank was confined to due care in the choice.of its correspondents, it follows that no cause of action by reason of the acts complained of accrued against the First National Bank of Cleveland. The cases which we have examined have considered the liability of the first collecting bank. We have in the case at bar a chain of banks. The responsibility of the Cleveland bank was limited to the proper choice of a collecting agent. It chose the Commercial National Bank of Chicago. Under the doctrine of the Montgomery County Bank case, by the special agreement between the Akron bank and the Cleveland bank, the Commercial Bank of Chicago became the agent of the Akron bank, and, if the loss had occurred through its negligence, would have been responsible over. It must be borne in mind that the note which had been indorsed to the order of the First National Bank of Cleveland was by it delivered to the Commercial Bank of Chicago with the indorsement,- “ Pay to the order of' any Bank, Banker,- Brokers or Trust Co¡; all previous indorsements guaranteed” by the First National Bank of Cleveland.

The agreement was that the Cleveland bank should be only held liable for due care in its choice of .its correspondents. Its choice was made when it sent the note to the Chicago bank. What relations existed between it and the Chicago bank does not appear from the record.' In the absence of proof of a special agreement, we must assume that the commercial rule laid down' in the Montgomery Country Bank case applies and that it was responsible to the Cleveland bank, from whom it received the note, for negligencé upon its part or that of its agent. But there was no agreement between it and the Akron bank, and there was no authority from the Akron bank to it, or from the Cleveland bank to it,- to choose as the agent of the Alcron bank a proper person, and thereby be exempted from all liability to either of said banks for any .neglect or default of-said agent. The Chicago bank in turn sent the note to the defendant, and again there is in the record no evidence of any special agreement between the Chicago bank and the Peoria bank which affected the general rule of law heretofore indicated. The Peoria bank in its turn sent the note to the People’s Trust and Savings. Bank at Gales-burg, and there is no evidence of any special contract or arrangement between those two banks.

The note was by its terms made payable at the Galesburg National Bank. It was not presented"at said bank for payment, either upon the first occasion of its transmittal to the People’s Trust and Savings Bank, or upon the second time when it was protested. The rule of law in this State is that to hold an indorser the bill or note must be .presented at the time and placé where made payable. (Parker v. Stroud,. 98 N. Y. 379; National Hudson River Bank v. Kinderhook & H. R. Co., 17 App. Div. 232; affd., 162 N. Y. 623.) Formal protest by a notary public is not essential to hold an indorser. . It is mere proof. What is essential is presentment and demand at the time and place provided for in the instrument, followed by notice to the indorser of such presentment, demand and non-payment.

So, notwithstanding the words “ No Protest ” in the letter of transmittal from the defendant to the People’s Trust and Savings Bank, it was still the duty of the said bank, having in its possession an indorsed note for collection, to have'presented it upon the due day at the Galesburg National Bank where made payable. If it had been so presented and a notice of such presentation had been sent back down through the line of banks, the rubber company would have been held upon its obligation, irrespective of the fact that the note had not been protested, and it was- the failure to present and notify which relieved the indorser, if it has been relieved. That failure was the failure of the Galesburg bank and not of the Peoria bank, and, it seems to us, it cannot be said, in view of the facts of this case, that the words “No Protest” in the defendant’s letter constituted the proximate cause of the release of the indorser.

So if we assume that the special agreement between the Akron bank and the Cleveland bank had the force and effect of constituting each of the banks in-the chain the agents of the Akron bank, then, each being responsible for its defaults and only .it's own defaults, it follows that the wrong party has been sued, the right of action, if any, being against the People’s Trust and Savings Bank of Galesburg for its failure to properly present the note at the time and place where and when made payable.

If, on the other hand, the special agreement was exhausted when the Cleveland bank exercised its power to. choose an agent and did not confer a similar power upon the Chicago bank, why then the Chicago bank, under the rule in the Montgomery County Bank case, must be considered to be the collecting bank and responsible for any subsequent default. “ The Bank of the State of New York not-having been employed by the plaintiff [bank] as its agent, owed -it no duty in respect to the draft,'and therefore is not liable to the plaintiff for any neglect of duty which it owed to its principal, the Albany City Bank, under its contract with it.” (Montgomery County Bank Case, supra.) The Supreme Court of the United States, adopting the rule of the Montgomery County Bank case, in the Exchange National Bank Case (supra), did so upon the ground that it was a general rule of commercial law. It seems' to us that the banking community have a right to rely upon it. To sustain the judgment in this case Would be to hold that the defendant, without knowledge of the special agreement, though with knowledge of the general rule, was liable not to its immediate predecessor but to a remote principal- upon the doctrine of agency of an undisclosed principal and for a negligence not of its own but of its correspondent. If the plaintiff is right, and the chain once, broken, all the links fall apart, and it lias the right to sue any one, it should have proceeded against the People’s Trust and Savings Bank. If it is not right and the rule has Only been affected so far as the Cleveland and the Chicago banks are concerned, it has no privity with the defendant or right to sue it, even assuming, which we do not at all concede, that its -act in allowing the words “No Protest” to appear upon its letter of'transmittal was the proximate cause of the loss.

It follows, therefore, that the judgment appealed from should be reversed and a néw trial ordered before anothér referee, with costs to the appellant to abide the event.

McLaughlin, Scott, Miller and Dowling, JJ., concurred.

J udgment reversed and new trial ordered before another referee, with costs to appellant tó abide event. Settle order on notice.  