
    Bridge Co. v. Savings Bank.
    
      Collateral security made payable at a particular bank — Duty of pledgee.
    
    1. Where a note is indorsed and delivered as collateral security, the indorser and indorsee are to be regarded as sustaining towards each other the relation of pledgor and pledgee; and if such collateral paper' matures before the principal debt, the duty and obligation of the pledgee in the collection thereof, is performed by the exercise of reasonable and ordinary care and diligence.
    2. If a note is made payable at a designated bank for the convenience of the maker, with no objection by the payee to the place of payment, and is indorsed and delivered by the payee to another bank as collateral security for the payee’s own note, and if the collateral paper falls due before the principal debt, it is the duty of the receiver of the collateral, in the absence of any sufficient reason to doubt the solvency of the designated bank, to lodge it with such bank for collection.
    (Decided January 29, 1889.)
    Error to the Circuit Court of Knox County.
    The Knox County Savings Bank — the defendant in error-filed in the Court of Common Pleas of Knox County its amended petition, which reads as follows:
    “The plaintiff, by leave of the court first had, files its amended petition, and avers that it is a corporation duly organized under the laws of Ohio, under the name of The Knox ■County Savings Bank, and fully authorized to loan money, and receive the notes hereinafter described.
    
      “ That the defendant is a corporation duly organized under the laws of Ohio, under the name of The Mount Vernon Bridge Company, and doing business and having its principal •office at the city of Mount Vernon, in said county and state.
    “ The plaintiff states that on or about the 14th day of February, A. D. 1883, the defendant, being desirous of borrowing money, made and delivered to plaintiff their promissory note, ■of which the following is a true copy j,
    ‘Mt. Vernon, O., Feb. 14, 1883.
    ‘ Thirty days after date, for value received, we jointly and severally promise to pay The Knox County Savings Bank, or •order, at their banking house, Mount Vernon, Ohio, twenty-eight hundred dollars, with interest, after maturity, at the rate of eight per cent, per annum, until paid. And we jointly and • severally hereby authorize any attorney-at-law to appear for us or any of us, in an action on the above note brought against us, or either of us, by said Knox County Savings Bank, at any time after said note becomes due, in any court of record in the state of Ohio or elsewhere, to waive the issuing and service of process against us, or any of us, and confess a judgment in favor of said Knox County Savings Bank against us, or any of us, for the amount that may be then due thereon, with interest at the rate therein mentioned and costs of suit; and, also, in behalf of us to waive and release all errors and the right of appeal in said proceedings and judgment and all proceedings, petitions and writs of error therein. As witness our hands and seals, this 14th day of February, A. D. 1883.
    ‘ $2,800.00.
    ‘Due March 16-19, 1883.
    ‘No. 2634.
    ‘Mt. Vernon Bridge Company,
    [seal.] ‘J. N. Keadington,
    ‘ Secretary.’
    
    “ To secure the payment of said note, the defendant duly endorsed and deposited with the plaintiff, as collateral security for the payment of said above mentioned note, and loan, two notes or orders, one calling for one thousand and ninety-two-dollars ($1,092), which was duly collected, and after collection applied in part payment of said loan, and one note or order, on the Commissioners of Highways of Panola township, Woodford county, in the state of Illinois, in favor of the defendant, of which note or order the following is a true copy :
    ‘ $1,740.00. The Commissioners of Highways of Panola township, Woodford county, state of Illinois, will pay to the order of The Mount Vernon Bridge Company, seventeen hundred and forty dollars, without interest, payable at the El Paso Bank, El Paso, on the 10th day of March, 1883.
    ‘ James Forsythe,
    ‘ Michael Gilbert,
    ‘Commissioners of Highways of Panola Township.’
    
    “ Plaintiff says that shortly before said claim fell due, its-, cashier consulted the defendant’s secretary and treasurer, who as such had had other and like business transactions with plaintiff, and who had negotiated said loan, as to its'collection,, whereupon plaintiff’s cashier according to the custom of banks, in such cases and the usage of plaintiff in like cases, sent said collateral to the El Paso Bank, with instructions to collect and forward the money in the usual way — by exchange on New York. The plaintiff’s cashier received a letter from the-officers of the El Paso Bank, bearing date the same day said collateral matured saying ‘ that it had not been paid,’ which advice he promptly communicated to the defendants’s secretary.
    “ Plaintiff says that the El Paso Bank, about the same time said collateral fell due, did receive the money on said collateral, and shortly thereafter failed. That on learning of the failure of the El Paso Bank, plaintiff immediately communicated that fact to the defendant’s secretary, who wrote to one of the agents of defendant then traveling in the west, to go to El Paso and look after the matter.
    “ The plaintiff further says that it had no other business than-what grew out of said collateral with the El Paso Bank, either before or since sending said claim for collection, nor did plaintiff know of the existence of said bank before it received said collateral; that so far as it could learn either through the commercial agencies, or otherwise, said El Paso Bank was in good credit when plaintiff forwarded said collateral for collection. Plaintiff says, there is not now, nor was there at the time plaintiff sent said collateral for collection, any other bank or collection broker in said town of El Paso, save the bank at which said collateral was made payable. That at the time said note or order was made payable at the El Paso Bank, the plaintiff had no connection with or knowledge of the making of such obligation. That the same grew out of a business transaction between the defendant and the Commissioners of Highways of Panola township. Plaintiff further says that since said $2800 note fell due, the defendant wholly failed and refused to pay said note, or any part thereof, and claims that said payment of said order to the bank of El Paso was a payment to the plaintiff. Plaintiff therefore asks judgment against the defendant for the sum of seventeen hundred and nine dollars and 24-100 with interest.”
    To this petition, The Mount Vernon Bridge Company — the plaintiff in error — filed its answer, of which the following is a copy:
    “And now comes the defendant and for answer to the petition of plaintiff, says, that it assigned and transferred to plaintiff, by its written endorsement thereon, the said $1,740.00 order, and delivered the same to plaintiff under the circumstances and upon the consideration set forth in said petition, and never afterwards assumed or pretended to have any authority or control over the same or the manner in which it should be collected, and never assumed any of the risks incident to the collection thereof; that defendant never gave any advice or directions to plaintiff, or any of its officers, as to the place to which, or the persons to whom, or the agency through which, the collection of said order should be made, and never was consulted by plaintiff or any of its officers as to the manner or means of making said collection.
    “ Defendant says that it is true that shortly after the failure of said El Paso Bank, its secretary did write to one of defendant’s agents then traveling in the west, to go to El Paso and look after this matter ; but defendant says that its secretary did so at the request of plaintiff, and wrote to defendant’s said agent that the plaintiff, the Savings Bank, requested him to see Panola Township Commissioners, and state what time the money was paid in, etc.
    
      “ Defendant says that it never had any business transactions or business relations with said El Paso Bank, and in fact did not know of its existence until said order was delivered to it already executed; that said order was made payable at said bank by the makers thereof merely for their own convenience in making payment, and without consulting defendant.
    “ Defendant says that it is not true that no other payments have been made upon said nóte than the $1,092 endorsed thereon, but defendant says that the entire residue of said note had been fully paid and satisfied by the collection of said $1,740 order, and that defendant is entitled to a judgment against plaintiff for the sum of thirty-two dollars ($32), the residue thereof after paying the balance of said note.
    
      “ Wherefore defendant not gainsaying the other allegations ®f said petition, prays a judgment against said plaintiff for said sum of $32, with interest thereon from the 13th day of March, 1883.”
    There was a demurrer to the answer, which demurrer was sustained, and judgment was rendered for the Savings Bank for the amount claimed, with interest and costs. '
    The judgment was affirmed by the circuit court, and to reverse such judgment of affirmance, a petition in error is filed in this court.
    
      A. JR. JMelntyre, for plaintiff in error.
    
      Samuel Israel and William M. Koons, for defendant in error.
   Dickman, J.

It is alleged in the original petition, that to secure the payment of the note upon which the action was founded, the Bridge Company indorsed and deposited with the Savings Bank, as collateral security, the note made by the Commissioners of Highways of Panola township. And the Bridge Company avers, that it assigned and transferred to the plaintiff below, by its written indorsement thereon, the note of the commissioners, and delivered the same to the plaintiff, under the circumstances and upon the consideration set forth in the petition. The Bridge Company and the Savings Bank, therefore, sustain towards each other, the relation of pledgor and pledgee. Notes deposited as collateral security are regarded as pledges, whether they have been indorsed and delivered as a part of the transaction of loan, or have been simply delivered without indorsement, where indorsement is required.

What then was the obligation resting upon the Savings Bank in reference to the collateral note which it held ? The general rule is that, where negotiable instruments, executed by third parties, are indorsed and delivered as collateral security for the promissory note of the pledgor, so that the pledgee of them becomes a party thereto, and such collateral paper matures before the principal ■ debt, the obligation of the pledgee in collection thereof is performed by the exercise of reasonable and ordinary care and diligence. As held in Roberts v. Thompson, 14 Ohio St. 1, where a party receives a note as collatei’al security for an existing debt, without any special agreement, he is bound to use ordinary care and diligence in collecting it, and such cases are not governed by the strict rules of commercial law applicable to negotiable paper. See Reeves v. Plough, 41 Ind. 204; Lawrence v. McCalmont, 2 How. U. S. 426; Noland v. Clark, 10 B. Mon. 239; Miller v. Gettysburg Bank, 8 Watts, 192.

We do not find, nor is it claimed, that there was any negligence, or want of due diligence on the part of the Savings Bank, in taking the proper steps for the collection of the collateral note or pledge. The facts, as admitted by the record are, that a short time before the collateral fell due, the cashier of the Savings Bank, according to the custom of banks and the usage of the Savings Bank in like cases, sent the collateral note to the El Paso Bank, where, by its terms, it was made payable, with instructions to collect and forward the money in the usual way — by exchange on New York. The cashier received a letter from the officers of the El Paso Bank, dated the day the collateral matured, saying, “that it had not been paid,” which information he promptly conveyed to the Bridge Company. But about the time the collateral fell due, the El Paso Bank did receive the amount due thereon, and shortly thereafter failed, and the Savings Bank immediately communicated that fact to the secretary of the Bridge Company, who wrote to one of that company’s agents travelling in the west, requesting him to go to El Paso and look after the matter. Before receiving the collateral paper, the Savings Bank had no knowledge of the existence of the El Paso Bank, and when the collateral was forwarded to it for collection, that bank, so far as was learned through commercial agencies and otherwise, was in good credit, nor was there any other bank or collection broker at that timo in the town of El Paso.

There was nothing to put the pledgee of the collateral on guard, or create suspicion as to the solvency of the collecting bank. Under the existing circumstances, it was the plain duty of the Savings Bank to 'lodge the collateral for collection at the designated bank, and in no other place. Had the Commissioners of Highways, with funds in hand and ready to pay, failed to find their note on deposit at the place appointed for payment, and afterwards become insolvent, the Bridge Company might well have charged the Savings Bank with supine negligence. So far as it pertained to the degree of care and diligence required of the Savings Bank as a pledgee, it was not for it to ask why the collateral note was made payable at a particular bank, or whether so made payable for the convenience of the makers or payee or both, unless, before forwarding it for collection, the pledgee had reason to doubt the good credit of the collecting bank — which it did not have in the present instance. The language of the instrument, and the delivery of it by the payee and owner as collateral security, without any new or qualifying direction, served as a notice and guide to the pledgee which it could not safely disregard. The pledgee, it is said, is a savings bank, but generally, while it is not among the powers and privileges of such institutions to make collections for the holders of negotiable paper, when tbey loan money upon collateral security, and it devolves upon them to collect such collateral, their duties, rights and liabilities as pledgees, arc to be determined by the same rules and principles that govern natural persons.

It is true that it seems'to be the accepted doctrine in America, that no presentment or demand of payment need be made at the specified place, on the day when a note becomes due, orafterwards, in order to maintain a suit against the maker.’ But if the maker has funds at the appointed place at the time to pay the note, and it is not duly presented, he will in the suit be exonerated, not, indeed, from the payment of the principal sum, but from the payment of all damages and costs in that suit. While, however, the payee and holder of the paper may, if he pleases, neglect presentment and demand at the appointed bank or place, the receiver of the paper as collateral, in the exercise of due care and diligence, should have the paper at the appointed place, for payment at maturity.

It is urged, however, in behalf of the plaintiff in error, that the Savings Bank received the note made by the commissioners of highways merely for the purpose of collection — the amount realized therefrom to be applied towards the payment of the note in suit. The El Paso Bank, it is claimed, was the agent of the Savings Bank — that payment to the agent was payment to the principal — and that, therefore, the loss of the collateral through the insolvency of the El Paso Bank, must be born by the Savings Bank, and not by the Bridge Company.

Granting that it was incumbent upon the defendant in error to transmit the paper at the proper time and to the proper place for payment, the defendant did not select the agent to collect the note, for that, as we think, had already been done by the plaintiff in error. It is alleged that the note was made payable at the bank by the makers, merely for their own convenience in making payment, and without consulting the payee. But the payee accepted and became party to the note, and delivered it as security without intimation that any other place of payment was contemplated, than that named in the body of the instrument. Nor can the bank as the place of payment, be separated from its officers who received, in due course of business, the amount of the note from its makers. It is generally understood in the mercantile world when negotiable instruments are made payable at a particular bank, that the paper will in due time be lodged in that bank for collection, and that the bank through its proper officer will receive the money when paid by the debtor. In Ward v. Smith, 7 Wall447, Field, J., in delivering the opinion of the court, says: “It is undoubtedly true that the designation of the place of payment in the bonds imported a stipulation that the holder should have them at the bank, when due, to receive payment, and that the obligors would'produce there the funds to pay them. It was inserted for the mutual convenience of the parties. And it is the general usage in such cases for the holder of the instrument to lodge it with the bank for collection, and the party bound for its payment can call there and take it up. If the instrument be not there lodged, and the obligor is there at its maturity with the necessary funds to pay it, he so far satisfies the contract that he cannot be made responsible for any future damages, either as costs of suit or interest, for delay.”

And in the early case of Wallace v. McConnell, 13 Peters, 136, it is stated by the court, that the place of payment in a promissory note, or in an acceptance of a bill of exchange, is always matter of arrangement between the parties, for their mutual accommodation, and may be stipulated in any manner that may best suit their convenience; and that when a note or bill is made payable at a bank, it is well known that, according to the usual course of business, the note or bill is lodged at the bank for collection; and, that if the maker or acceptor calls to take it up when it falls due, it will be delivered to him, and the business be then closed. Indeed, the common understanding is, that the appointment of the bank as the place where the note is to'be paid, implies the agency of the bank in making the collection.

The El Paso Bank being, in our opinion, the appointee of the Bridge Company and the Commissioner of Highways, and not of the defendant in error, the decision in Reeves v. The State Bank, 8 Ohio St. 465, can have no immediate bearing upon the present case. The rule, resting upon the soundest judgment, was there laid down, that where a bank in this state receives for collection a draft payable in another state, and for the same purpose forwards the draft to its correspondent in such other state, the bank here is responsible to the owner for the conduct of such correspondent, and for the proceeds of the draft, immediately upon its collection by such correspondent. Such correspondent, it was held, is the agent of the bank here, and not the sub-agent of the owner of the draft; and payment to the agent is payment to the bank, unless there was some agreement or authority between the owner and the bank, beyond the mere fact of the draft being received for collection. It entered into the reasoning of the court of errors, in Allen v. The Merchants’ Bank of New York, 22 Wend. 215, that when a note is left by the owner at a bank, and received for the purpose of being sent to some distant place for collection, he makes an implied contract with the bank, that the proper and expedient means shall be used to collect the note, and he presumes that proper agents will be employed The owner having no part in the selection of those agents and the bank in making collections for its customers not rendering a gratuitous, but more often a lucrative service, it has been deemed not unreasonable to hold the bank responsible for the conduct of the agents it employs. But it can not, consistently with the facts in the present case, be said, that the Savings Bank was left to the exercise of its discretion, in the appointment of an agent to collect the note which it held as security. On the contrary, the El Paso Bank must be held to have been adopted by the plaintiff in error and the Commissioners of Highways, for their own convenience, as their agent for that purpose. For the foregoing reasons, we have reached the conclusion that the judgment of the circuit court should be affirmed.

Judgment accordingly.  