
    Robert L. Leach, State Superintendent of Banking, et al., Appellants, v. Citizens’ State Bank of Arthur et al., Appellees.
    1 BANKS AND BANKING: insolvency — Preference—Drawee Bank as Agent to Collect from Self. The act of the indorsee of a cheek in sending it to the drawee bank for “collection and remittance” creates no'relation of principal and agent. The result is that, if the drawee bank becomes insolvent, the indorsee’s claim on account of the cheek is not a preferred &aaxxi.
    
    2-BANKS AND BANKING: Insolvency — Purchase of Draft — Non-trust Relation. The mere purchase of a draft gives rise to no trust relation between .the purchaser and-the bank issuing the draft.
    3-BILLS AND NOTES: Drafts and. Checks — Operation and Effect in Be Assignment.' Principle reaffirmed that the mere issuance of a draft works no equitable assignment to the payee of the funds of the drawer in., the hands of the drawee, and that consequently, in ease of the subsequent insolvency of the drawer,, the payee-is. not a preferred creditor.
    Headnote 1: 7 C. J. p. 751. Headnote 2: 7 C. J. p. 751. • Headnote 3: 5 C. J. p. 916. -.
    Headnote 3:- 2 B. C. L. '62l.
    
      'Appeal from Ida District Court. — E. G. Albert, Judge.
    December 14, 1926.
    Rehearing Denied April 7, 1927.
    ' Tbe -intervener Federal Reserve Bank claimed a preference in tbe distribution of assets in tbe bands of tbe state superintendent of banking, as receiver of an insolvent state bank,-on the theory that tbe bank bold funds as trustee. From a decree establishing such preference tbe state superintendent of banking and Anderson, intervener, appeal.
    
    Reversed.
    
      Een J. Gibson, Attorney-general, and Herbert A. Huff and S.'S. Faville, Assistant Attorney-generals, "for' Superintendent of Banking, appellant.'
    
      J. R. Murphy, for A. G. Anderson, Intervener, appellant.
    
      
      Charles L. Powell and Snell Bros., for Intervener Federal Reserve.Bank, appellee. - >
    
   Vermilion, J.

The facts are not-in dispute. The Federal Reserve Bank of Chicago sent by mail, direct' to the Citizens’ State Bank of Arthur, checks drawn by various parties on the latter bank. The checks were sent in two lots, -and with each was a communication called a cash letter, which read: - >'

“We enclose herewith for collection and remittance, at par items listed below.”. - - ■ . - . : ■ ■

The Citizens' State Ba~ak charged the various checks to the accounts &f the several drawers, and i~sued its two draJ~ts u~on the Continental & Commercial National Bank of Chicago, payable to the order of the Federal Reserve Bank, one. for: the amount. of th~ checks ineloséd with each cash letter. These drafts were received b~r the Federal Reserve Bank, and, throug~h the clearing house, pesented to the drawee They were not paid, and were returned marked: "Not sufficient funds." On the next business day, the drafts were by messenger again ~preseuted. Payment was again refused, and the drafts marked: "Drawiiig bank reported closed." The Citizens' State Bank closed its doors on the morning of the day the drafts were for the second time presented to the drawee fo~ payment, and before such presentation. The appellant the~ state siuperintendcnt of banking ~as subsequently appointed receiver, and the bank is insolvent and in procesa of liquidation.

The Citizens’ State Bank was not-a member of, or stockholder in, the Federal -Reserve Bank, and had ho deposit account in that bank, nor did the appellee have any deposit-in the Citizens’ State Bank. There was another bank in the town of Arthur. It had, at' one time, been the practice of the Federal Reserve Bank to send cheeks' on the Citizens ’ State Bank to such other bank for collection; but, at the request of the Citizens’ State Bank, for some time'immediately, -prior to-these transac-. tions, such checks had-been sent directly to-:the latter. This arrangement was made by correspondence, and did-not include any agreement as to the manner of remitting the proceeds of collections.

Upon this state of facts, and a further showing from which it is claimed it appears that the amount of the checks went to augment the assets in the Citizens’ State Bank, and was traced into the possession of the receiver, the Federal Reserve Bank asked that its claim for the amount of such cheeks be established as a preferred claim, against the assets in'the hands óf the receiver, on the theory that a trust was'created.

The determination of-the question of the existence of a'trust depends primarily upon whether the relation of the Federal Reserve Bank to-the Citizens’ State Bank was that of principal and agent, with respect to the fund. If the relation was that of principal and agent, and the fund augmented the assets -in the Citizens’ State Bank, and has been traced into the- hands of the receiver, it is not open to question that, under oúr prior' decisions,- a trust was established, and the preference was properly allowed. Nurse v. Satterlee, 81 Iowa 491; Brown v. Sheldon St. Bank, 139 Iowa 83; Messenger v. Carroll Tr. & Sav. Bank, 193 Iowa 608; Murray v. North Liberty Sav. Bank, 196 Iowa 729.

I. The relation of the Federal Reserve Bank to the Citizens ’ State Bank, as the holder of checks drawn upon the latter, clearly involved no relation o-f trust. It was merely the holder of cheeks drawn by depositors in the latter bank upon funds so on deposit therein, and as to which the Citizens’ State Bank was the debtor' of the depositor. If the checks had been personally presented at the counter of the' Citizens’ State Bank by an agent of the Federal Reserve Bank, and the draft of the latter had been accepted therefor, or if such an agent and the drawee bank had cleared checks held by one against the other,- by the draft of the one against whom the balance wás found, no trust arising from a relation of principal and agent would have been created. In such case¡ no element of agency between the holder of the cheeks and the drawee bank is present, and the relation is only that of debtor and creditor. We so held in Danbury St. Bank V. Leach, 201 Iowa 321, and Leach v. Iowa St. Sav. Bank, 202 Iowa 95.

The -question is narrowed to- the proposition whether the relation of principal and agent arose when the Federal Reserve Bank sent the cheeks by mail directly to the drawee bank. At this point, appellee stresses the language of the accompanying letter: that they were sent ‘ ‘ for collection and remittance. ’ ’ But that, in our opinion, is far from conclusive. When the holder óf a check presents it to the drawee and receives the amount called for by it, he may, in a sense, be said to collect it, but, more properly speaking, he receives payment of it. Certainly, such a transaction involves no question of agency between the parties immediately concerned/ but it is one between-two principals, one of whom is entitled to receive, and the other is bound by its obligation to its depositor to pay, the amount called for' by the check. Each is acting for himself; not one for the other. Such was- the holding-in Danbury St. Bank v. Leach, supra.

, The checks were, obviously/-’not sent for collection in the sensé that the drawee bank should'collect them from the-drawers by presenting them to, and receiving payment from; the drawers. They were sent to the bank on which they were drawn, -for payment by that bank. The drawee baik -was-under obligation to its depositors, the drawers of the cheeks, to pay -out their funds upon their order’s. The checks were such orders, and the Federal Reserve Bank, as- the holder of the orders] was entitled to such payment on presentation, if- the drawers’ funds oh-deposit were sufficient for that purpose.-

We are unable to see that the sending of the checks to the drawee bank by mail gave rise to any other or different relation than would their presentation over the counter. The drawee was under, and assumed,' no obligation except' such as it sustained to the drawers of the cheeks to pay 'them, if their deposits were sufficient. The drawee, to the extent its draft was paymént, paid the checks, in pursuance of its obligation -to its depositors to do so. It did-not act, or assume to act, for or as the representative of the holder, but in’ discharge of its own obligation. ' The cheeks, it is true, were intrusted to the bank, but only for payment by it, not for the bank to do something with them for the- holder, as to collect them from the drawers or some third person,'-but to do what it was- itself bound to do in respect to them. The manner of payment, by remittance to the holder, was at the direction of the holder. But, when we consider the remittance as a mere manner of payment; in so doing the drawee was still simpiy fulfilling its own‘Obligation, in the manner directed by the holder.'

It-is an elementary principle of the law of agency that an agent cannot, except with the full knowledge and consent of his principal, act for the principal in a transaction where he’ has, either in his own right or for a -third party;, an adverse interest. Where one.acts in a transaction with another- in performance of an obligation resting upon him, the knowledge.and consent of the. other that, he is so acting would seem to have the effect rather -to destroy all idea of agency than to bring, the transactions within the exception. In such case, the-one demands what he has a right to demand of the - other, .and the latter does what he is bound to' do.

It is generally held, although there is authority to the' contrary, that,: as ■ between the owner of a cheek and-a bank to which it is given for collection; the drawee bank, .particularly where there.is another bank in the same city, cannot be considered a suitable agent, in contemplation of law, to- enforce, on behalf of the owner, the demand against. itself, and that the bank so .sending the- .check to the drawee bank is. guilty of negligence. Western Wheeled Scraper Co. v. Sadilek, 50 Neb. 105 (69 N. W. 765); Pickett v. Baird Inv. Co., 22 N. D. 343, (133 N. W. 1026); German Nat. Bank v. Burns, 12 Colo. 539 (21 Pac. 714); Anderson v. Rodgers, 53 Kan. 542 (36 Pac. 1067); Winchester Milling Co. v. Bank of Winchester, 120 Tenn. 225 (111 S. W. 248, 18 L. R. A. [N. S.] 441); Minneapolis S. & D. Co. v. Metropolitan Bank, 76 Minn. 136 (78 N. W. 980); First Nat. Bank v. Bank of Whittier, 221 Ill. 319 (77 N. E. 563); First Nat. Bank v. Citizens’ Sav. Bank, 123 Mich. 336 (82 N. W. 66); Herron Co. v. Mawby, 5 Cal. App. 39 (89 Pac. 872); Jefferson County Sav. Bank v. Hendrix, 147 Ala. 670 (1 L. R. A. [N. S.] 246); 7 Corpus Juris 615. These cases are illuminative of the attitude of the courts toward the. principle involved, that no agency is created by the sending or presentar tion of checks to-the drawee for payment. .

The cases where the question has arisen in the precise situation presented here are not in agreement. In People v. Merchants & Mechanics’ Bank, 78 N. Y. 269, speaking of a-like situation, the court.said: , •

“The learned counsel contends that the Troy bank was agent of the -Chemical Bank- to receive payment of the check. * * * But it is rather metaphysical to argue that any such agency was created. The check was sent by.mail.to the bank upon which it was drawn,, for payment,, not for collection. True, the holder entrusted the, bank with the custody of the check until it should b.e paid., But that is: done every time a check is prer sented over, .the counter for payment. . The only difference in this case is that, instead of standing , at the counter, or sending someone to. stand there, to receive payment, the holder requested .the bank to remit by mail. ” ■

In Lamro St. Bank v. Farmers’ St. Bank, 34 S. D. 417 (148 N. W. 851), it was held that, since the checks were issued prior to- the enactment . of; the Negotiable Instrument. Law, they amounted to an .assignment of the credit .of the depositor to the extent of the checks, and the payees of the checks-to,that extent became creditors.of the bank, and it was said:- .. , :

.. ‘‘When.the checks were indorsed to the appellant, it became a creditor of the respondent bank, to the extent of the face of the checks.; and when appellant exchanged the checks for the drafts, it in no wise changed its relationship to the respondent. It was a creditor of the respondent-bank before the issuance .of, the drafts,- and it was a creditor after, they had- beenfssued.”

- - : It was said, that-the case fell, within the rule, of People v. Merchants & Mechanics’ Bank, supra.

. In Missouri, the St. Louis .Court of Appeals, in American Bank v. People’s Bank (Mo. App,), 255 S. W. 943, said that it could not become reconciled to the proposition that, where the depositor of a bank by his check ordered.the bank to pay to another all or a portion of his deposit, and the payee of the checlc applied to the bank for payment.of .the cheek,, he thereby constituted the bank his agent, to collect from itself for him the amount of the .cheek; or that thereby the bank, became, a .trustee for. the use and benefit of the payee. The -Supreme .Court of. that state has, however, held, in Bank of Poplar Bluff v. Millspaugh, 313 Mo. 412 (281 S. W. 733), and Federal Reserve Bank v. Millspaugh, (Mo.), 282 S. W. 706, that the act of one bank in.send: ing to another a check or .draft drawn on. the-latter for “collection” was equivalent to designating the latter as the agent .of the sender, to present the paper 'to, itself, and" collect and send the money.; and that in such a situation a trust relation existed/ from which, under proper circumstances, a right to a preference would arise. : .- -

The Supreme Court of Virginiahas- held, in Federal Reserve Bank v. Peters, 139 Va. 45 (123 S. E. 379), that, when-a.bank receives from its correspondent a check .upon itself, it is an agent for its correspondent,.'to make presentation to itself. It cites, in support of the doctrine announced, only the case of Hilsinger v. Trickett, 86 Ohio St. 286, which merely holds that the sending of a check to the drawee bank where there is no other bank in the town is not negligence. The Peters case -was followed in Federal Reserve Bank v. Bohannan, 141 Va. 285 (127 S. E. 161), without discussion of the particular point.

■ The' Supreme Court of Kansas, in Kesl v. Hanover St. Bank, 109 Kan. 776 (204 Pac. 994), by a divided court, held'that such a transaction had the same effect as though the drawee bank, in its capacity as agent of the holder of the check, had presented the cheek -to itself, in its capacity as drawee-, for payment,1 and received the actual money. 1

Distinguished ás are the courts so holding, we are unable to subscribe to a doctrine that will create what, we think, is a wholly fictitious relation of principal and agent, out of the presentation of a check by the holder bank to- the drawee bank, with directions to remit the amount called for, or to distinguish, — as would be necessary, should we so hold, in view of o-ur former decisions,— between the presentation of the check over the counter of the drawee bank and its presentation by mail, with directions to remit. •

The case of Messenger v. Carroll Tr. Sav. Bank, 193 Iowa 608, does not support appellee’s contention at this point. In that case, ■ a sight draft drawn on a depositor of the bank -was sent to the bank for collection, 'and we held that the relation was that'of principal and agent. The fact that the draft was paid to the bank by the check of its depositor did not bear 'upon the relations betwéen- the sender of ’the draft and the collecting bank, but was urged as showing that the funds in the bank were not augmented by the amount so collected.

It seems to us to be more in consonance with sound reasoning to say that the mere sending of cheeks to the drawee bank by mail, with direction to remit, instead of presenting them at the bank’s counter for-payment, does not create a relation of principal and agent, than to overlook the obvious inconsistency involved in holding that by so doing the drawee bank becomes the agent of the -holder, to collect from itself: - No such relation arose from the mere fact that one bank held'checks upon the other, and no such relation would be created by their presentment for payment; nor do we think it would be created by the manner of their presentment, considered as a mere demand for payment, whether in person, or by mail. • '

.-II.. It is generally held that the mere purchase of a draft gives rise to no trust relation between-the purchaser and the bank issuing the draft. American Exp. Co. v. Cosmopolitan Tr. Co., 239 Mass. 249 (132 N. E. 26); Beecher v. Cosmopolitan Tr. Co., 239 Mass. 48 (131 N. E. 338); Legniti v. Mechanics & Metals Nat. Bank, 230 N. Y. (130 N. E. 597); Spiroplos V. Scandinavian-American Bank, 116 Wash. 491 (199 Pac. 997); Chetopa St. Bank v. Farmers & Merch. St. Bank, 114 Nan. 463 (218 Pac. 1000); Harrison v. Wright, 100 Ind. 515; Jewett v. Yardley, 81 Fed. 920; Clark v. Toronto Bank, 72 Kan. 1 (82 Pac. 582, 2 L. R. A. [N. S.] 83); Danbury St. Bank v. Leach, supra.

We may say here that there is no claim that the officers of the Citizens’ State Bank had knowledge, when the. drafts were issued, that the bank was insolvent, and that for that reason a trust relation arose. See Whitcomb v. Carpenter, 134 Iowa 227.

III. But it is contended that the drafts issued to the Federal Reserve Bank constituted equitable assignments of .a fund in the Continental & Commercial National Bank, as against the drawer, or against the receiver, representing the drawer, and that out of such fact a trust arose. We have held to the contrary in Leach v. Mechanics Sav. Bank, 202 Iowa 899, and it is unnecessary to fur.ther . discuss the question here. -We conclude that no relation of trust was established, and; that the Federal Reserve Bank was not entitled to a preference.

A motion to dismiss-the appeal submitted with the case- is overruled.

The judgment and decree are — Reversed,

De G-raep, C. J., and Evans, J., concur..

Morling, J., concurs in the result.

Stevens, Faviuue, and Albert, JJ., take no part.  