
    COURT OF APPEALS.
    John C. Southwick, respondent, agt. First National Bank of Memphis, appellants.
    Pleading— Complaint—Ya/rianae—Failure to prove cause of action alleged in its entire scope—Pa/rty ca/nnot allege one ca/use of action and recover upon another — Bills, notes, checks and drafts — What is not a payment Under "mistake of facts—Collecting a diverted draft not a diversion—• Demand and refusal.
    
    Southwick, Thayer & Co., of Memphis, Tennessee, were the acceptors of a draft dated March thirteenth, and drawn to the order of J. R. Merriam & Son, cif Boston, which 'the latter had endorsed and negotiated to Francis P. Merriam, who held it at maturity, and sent it to Memphis for collection. The acceptors being unable to pay this draft, were authorized by the payees (J. R. M. & Son), by a telegram sent from. Boston to Memphis, to draw on the latter for the amount necessary to take up the old draft.
    S. T. & Co., on May sixth, drew as authorized, and instead of using the draft to take up the old one, applied it to the payment of an antecedent debt due by them to the defendants — a bank in Memphis—the latter having no notice of the telegram, or of the object or purpose of the draft of May sixth, and being ignorant of the misapplication. The defendants sent the draft to Boston for collection, where it was accepted and paid by J. N. M. & Son, in ignorance of its misapplication, and the defendants (before they were informed of the diversion) credited the proceeds on the debt due them by S. T. & Co.:
    
      Held, 1. That although the defendants could not have enforced the draft against the acceptors, because they (the .defendants) had not paid a new consideration for it, yet, having collected it, and applied the proceeds in payment of a debt (although an antecedent one), they could retain the money.
    3. That although J. N. M. & Son accepted and paid the draft of May sixth in ignorance of the diversion and of the fact that the proceeds would not be applied to take up the draft of March thirteenth, yet this was not a payment "under a mistake of fact,” within the rule that money so paid can be recovered; the mistake being as to an “ extrinsic” and not an " intrinsic ” fact.
    3. That the defendants, in collecting the diverted draft, were not guilty of a conversion of it (Oomstock agt. Hier, 73 N.T., 269, distinguished).
    
    
      4. That even if J. N. M. & Son could recover from the defendants the money paid by the former on the diverted draft, yet the action would
    . not lie without a previous demand and refusal; and that the letter of J. N. M. & Son, mentioned in the opinion of the court, did not amount to a demand, and the answer of the defendants (also quoted in the opinion) did not amount to a refusal.
    Plaintiff sued as the assignee of the rights of J. N. M. & Son (the acceptors and-payers of the diverted draft), and also as the assignee of the rights of F. P. M., the owner of the draft of March thirteenth, for the payment of which the draft of May sixth was authorized to be drawn, and was paid. The complaint alleged that the defendants received the draft of May sixth upon a promise to collect it and apply its proceeds in payment of the draft of March thirteenth, then held by F. P. M.; that is to say, the action was upon the rights of the plaintiff as assignee of the holders of the latter draft. No such promise, either express or implied, was proved, but the plaintiff was allowed to recover upon the rights of J. N. M. & Son, the acceptors and payers of the diverted draft of May.sixth; the plaintiff having set forth in the complaint the assignment to himself of the rights both of J. N. M. & Son and of F. P. M,:
    
      
      Held, that the complaint must he taken to set forth only one cause of action—to wit, the alleged promise of the defendants to apply the proceeds of the draft of May sixth in payment Of the draft of March thirteenth, and that it was a fatal variance and error to allow the plaintiff to recover the money paid hy J. N. M. & Son on the diverted draft.
    
      Held, that the fact that the defendants were not “surprised” at the trial did not justify a recovery upon a cause of action not declared on (South-wick agt. First National Bank of Memphis, 20 Hun, 349, reversed).
    
    
      March, 1881.
    
      Barlow <& Olney and Ercmcis P. Ba/rlow, for defendant and appellant.
    
      John E. Bwrill, for plaintiff and respondent.
   Earl, J.

The defendant claims that the plaintiff failed npon the trial to establish by proof the cause of action alleged in his complaint. To determine whether this claim is well founded, we will first see what facts were proved, and thus ascertain for what cause of action the recovery was had, and then see if such caúse of action is fairly embraced within the facts alleged in the complaint.

The material facts, as proved, are as follows-: Southwick, Thayer & Co. were a firm doing business in Memphis, Tennessee, and J. IN. Merriam & Son were a firm doing business in Boston. On the 13th day of March, 1873, George H. Thayer, a member of the Memphis firm, drew a draft upon that firm, which was accepted by them, for $2,500, payable in Memphis in forty days to the order of the Boston firm. The latter firm indorsed the draft to F. P. Merriam, who became the owner and holder thereof, and he sent the draft to Memphis for collection. Shortly prior to the maturity of that draft, A. FT. Merriam, of the Boston firm, being at Memphis, was.notified by the Memphis firm that probably they w;ould not be able to pay the draft at maturity, and was asked if, in that case, they might draw on the Boston firm a new draft, the proceeds of which should be used to take up the old draft. This request was assented to on condition that they should not draw the new draft without special authority. Early in Hay, the Hemphis firm notified the Boston firm that they would not be able to take up the old draft, and requested permission to draw. Whereupon, on the fifth day of Hay, the Boston firm sent them' a telegram as follows: “You may draw upon us at sight for $2,500, to pay draft in our favor.” On the next day the Hemphis firm drew upon the Boston firm a sight draft for $2,500, payable to their own order and indorsed by them, and their book-keeper, Wiggs, on their behalf, took it to the defendant’s bank, with which they had had previous dealings and an account, and asked defendant’s cashier if he would discount it and let his firm check out the proceeds. This the cashier refused, but he said he would take the draft and place it to the credit of the drawers on over-checks owing by them to the bank. Wiggs then consulted the drawers, and on the same day, with their assent, delivered the draft to the bank to be discounted, the proceeds to be credited to them in account, and they were thus credited. At that time the drawers were indebted to the bank in a much larger sum than the amount of the draft. The bank had no knowledge of the telegram authorizing the drawing of the draft, or of the purpose for which the drawers were authorized to draw. The bank thus became a bona fide holder of the draft for value, but not for value parted with at the time. Several days subsequently the Hemphis firm drew a check on the defendant to pay the old draft, and it refused to pay the check on the ground that their account was not then good. After receiving the new draft and crediting its proceeds to the account of the drawers, the defendant sent it to its corresponding bank in Boston for collection. That bank presented it to the drawees for acceptance and payment, and it was accepted Hay tenth and paid Hay thirteenth, and the proceeds were credited by the Boston bank to the defendant, and were by it subsequently checked out in the course of its business.

The Memphis firm was not, at the time of the negotiation of the new draft, known to be insolvent, but they became openly insolvent in the latter part of June or the fore part of July, 1873, and were subsequently put into bankruptcy. This suit was not commenced earlier than the twenty-ninth day of July. At the latter date the Boston firm and F. P. Merriam assigned all their claims against the defendant to the plaintiff.

TJpon these facts the court directed a verdict for thq plaintiff, and its decision was probably based upon the theory that the defendant could be charged with a wrongful conversion of the draft, or upon the theory that the drawees paid the draft under a mistake of facts. In the opinion pronounced at the general term the* .judgment entered upon the verdict was sustained upon the latter theory, and the learned counsel for the plaintiff, in his argument before us, attempted to sustain it upon both theories.

It is entirely clear that no cause of action for a conversion of the draft, or to recover back money paid by mistake, is alleged in the complaint. On the contrary, the facts alleged show that there was no wrongful conversion of the draft, and that the money was paid under no mistake of any existing facts, and no mistake is in any way alleged or to be inferred from the language used.

The complaint first alleges the making of the old draft and that the same was owned and held by F. P. Merriam; that it had matured and become payable and had been forwarded to Memphis for cpllection; that the Boston firm authorized the new draft to be drawn upon them in order to provide funds necessary to pay the old draft, and agreed to pay such draft upon condition that the proceeds should be used for that purpose only; that the new draft was thereupon drawn and -delivered to the defendant, which was notified of the object and purpose for which the draft was authorized to be drawn, and for which the same was drawn, and that it received the draft and undertook and agreed to collect the same for the purpose aforesaid, and that the proceeds thereof, when collected, should be applied to the payment thereof; that the draft was accepted and paid for the object and purpose and upon the condition aforesaid, but that the defendant neglected and refused to apply the amount paid upon the old draft although requested so to do; that the draft remains unpaid, and that J. if. Merriam & Oo. and F. P. Merriam have sold and transferred the same and the moneys paid thereon to the plaintiff, together with all claim and cause of action against the defendant, upon or by reason thereof, or by reason of the premises and the matters before alleged ; and judgment is demanded for $2,500, and interest from May 6, 1873.

It is thus seen that the only 'cause of action alleged in the complaint is based upon the promise of the defendant to take the draft, collect it and apply the proceeds upon the old draft. This is plainly and explicitly set out. The proofs entirely failed to "establish such a cause of action, and the objection that it did so fail was plainly and pointedly several times taken at the trial.

The Code requires that the complaint must contain a plain and concise statement of the facts constituting the cause of action, and that the pleadings must be liberally construed with a view to substantial justice between the parties; and in section 723 ample power is conferred upon the court to amend pleadings at any stage of the action, and where the amendment does not change substantially the claim or defense, to conform the pleadings to the facts proved.

Here, although the defect in the complaint was pointed out in due time upon the trial, no amendment was asked for or ordered. This is not a case where the pleadings can, after the trial, be conformed to the proof, as such an amendment would change substantially the claim of the plaintiff as alleged. This is not a case of mere variance or mere defect, but a case of failure to prove the cause of action alleged in its entire scope.

' Pleadings and a distinct issue are essential in every system of jurisprudence, and there can he no orderly administration of justice without them. If a party can allege one cause of action and then recover upon another, his complaint will serve no useful purpose, hut rather to ensnare and mislead his adversary. Here the defendant was brought into court to answer a complaint that he had violated his promise to apply the proceeds of the draft, and he took issue upon the alleged promise; and when he came to trial he was held liable, not for any breach of promise, but for the money paid by the Boston firm on the ground of a conversion of the draft or the mistake of facts which induced the payment of the money. The cause of action alleged was one held by the plaintiff as assignee of F. P. Merriam for the breach of the promise to pay the old draft owned by him. The cause of action for which the recovery was had was one which the plaintiff held as assignee of J. H. Merriam & Go. for the recovery of the money paid by them upon the new draft. It is no answer to this objection that the defendant was probably not misled in its defense. A defendant may learn outside of the complaint what he is sued for, and thus may be ready to meet plaintiff’s claim upon the trial. He may even know precisely what he is sued for when the summons alone is served upon him; yet it is his right to have a complaint, to learn from that what he is sued for, and to insist that that shall state the cause of action which he is called upon to answer; and when a plaintiff fails to establish the cause of action alleged, the defendant is not to be deprived of his objection to a recovery by any assumption or upon any speculation that he has not been injured.

But, passing this point, the defendant further contends that the plaintiff ought to have proved a demand upon it for the draft or the money paid thereon before commencement of the suit, but that it failed to prove such demand.

It is not disputed by the plaintiff that such a demand was necessary, unless it was in some way waived by the defendant, or unless it was in some way estopped from insisting upon a demand.

Whether the action be treated as one for the conversion of the draft or of the money paid thereon, or for the recovery of money paid by mistake, a demand was a prerequisité to the maintenance of the action against the defendant, who lawfully and innocently received the draft and the money paid thereon. The obligation of a party to refund money voluntarily paid by mistake can arise only after notification of the mistake and a demand of payment (Powers agt. Bassford, 19 How. Pr., 309; Sluyter agt. Williams, 37 How. Pr., 109 ; Stevens agt. Board of Education, 3 Hun, 712; Stacy agt. Graham, 14 N. Y., 492; Freeman agt. Jeffries, 4 Exchequer [Law Reports], 189, 200, 201). Here the requisite demand was not only not proved, but was not alleged in the complaint. The only demand alleged was a request to apply the proceeds of the new draft upon the old one, in pursuance of the alleged promise of the defendant. Ho demand to pay the money to the plaintiff or his' assignors is alleged, and none was proved to have been made before the commencement of the action. There was no proof that before the commencement of the action defendant had any knowledge of the telegram of Hay sixth, or of the purpose for which the drawers were authorized to draw the new draft, or of any claim- that the drawees had paid the draft under any mistake, or that they claimed that the money paid should be refunded to them. There is no proof, even, that it had any knowledge that the draft or its proceeds had been improperly diverted. It is shown that it refused to pay a check drawn to take up the old draft and declined to pay that draft when presented; but it is not shown that they were, at the time when the check and draft were presented for payment or any other time before the commencement of the suit, informed of the circumstances now relied upon by the plaintiff connecting that draft with the new one. The plaintiff at the trial attempted to show a demand, or an excuse for not making one, by two letters; and unless such demand or excuse is found in these letters it is not found in the case. The first letter is dated Hay 13, -1873, and was addressed by the Boston firm to W. W. Thatcher, cashier of the defendant at Memphis. It is as follows:

Snt.—We are much surprised at the communication we have received this day from S., T. & Go., relating to the position you have taken about the draft on us, viz., not honoring their checks and allowing them to pay their draft in our favor. You had our explicit authority to draw on us (purpose specified also), and you have never yet had occasion rightly to doubt our honor and ability to pay all we contracted to, to the utmost farthing. We of course recognize your right to decline to cash their draft; that must be as your own judgment dictates. But to obtain their obligations and retain the funds for two weeks, thus putting us to annoyance and inconvenience without just cause, is not in accord with our Hew England ideas of honorable business dealing. All through this unfortunate affair we have tried to act towards you in a perfectly frank and honorable manner. We showed our hand to Mr. Davis, and offered him everything we could, and certainly don’t back water ” now; but we can’t submit to transactions of this.kind. We would like to hear why you seem to have lost confidence in us. By letting S., T. & Go. pay our draft you don’t hurt your case. Answer.

Yours, &c.,

J. H. MERRIAM & SOH.

Here is no intimation that the new draft, or the money paid thereon, had been diverted or wrongfully converted; and there is no notice of any mistake inducing the payment of the draft, and no demand of any kind. To this letter Thatcher replied, under date of May 20, as follows:

Gentlemen. — Your favor of the 13th is before me, and I do not exactly understand it. Messrs. S., T. & Go. were overdrawn on our books say $6,800; they deposited with me a sight draft on you for $2,500, which was placed to their credit, and they were informed at the time that no check would be allowed against it, but it must go to reduce their overdraft. I had no intention - of taking the draft except to reduce their account. If you understand the transaction differently, I would be pleased to hear from you, and we will compare notes regarding it.
Respectfully,
W. W. THATCHER, Cashier.

This was a perfectly frank and fair letter explaining the situation, saying that he did not exactly understand the prior letter, which was certainly obscure and confusing, and asking for information in case the writers of the prior letter understood the facts differently from what he stated them. This letter contained no refusal to comply with any demand, if one had been made, and no position was taken therein which excused a demand or precluded the defendant from insisting upon one. This, so far as appears, ended the correspondence between the parties, and the suit followed.

It matters not that it is quite probable that the defendant would not have complied with a demand, if one had been made, for that does not dispense with the necessity of making one. When a demand is necessary, it is not excused by showing that the defendant would not probably have complied if one had been made. And it matters not that the defendant has, upon the trial, contested the plaintiff’s right to "recover. That has occurred since the commencement of the action, and the plaintiff’s right of action must have been perfect when the suit was commenced.

The objection that no demand was made was distinctly taken on the trial, when the plaintiff offered in evidence the first letter, and in defendant’s motion to nonsuit the plaintiff, at the close of plaintiff’s evidence, and again at the close of all the evidence.

We are, therefore, of opinion that the point we have just considered, was well taken. But, upon the assumption that the complaint is sufficient and that a proper demand was made, we are of opinion that the facts proved did not warrant the verdict ordered. Here there was no conversion of the draft by the defendant. It was delivered to it by the only persons at the time liable thereon. If the telegram of the drawees be regarded as an unconditional promise, in writing, to accept the draft, it did not bind them as acceptors because the defendant did not receive the draft “ upon the faith” of the telegram (1 R. S., 769, sec. 8 ; Greele agt. Parker, 5 Wend., 414; Bank of Michigan agt. Ely, 17 Wend., 508; Burney agt. Worthington, 37 N. Y., 112; Johnson agt. Clark, 39 N. Y., 216). After the defendant received the draft from the drawers it could hold it against them as drawers and indorsers thereof, and no one could control their dominion over it. The drawees could not have then sued it for the conversion or for the possession of the draft; or to restrain any use which it might choose to make of it. After the defendant obtained the draft all it did with it was to present it for acceptance and payment to the drawees, and after payment it delivered the draft, as we must presume, to them. It thus parted with the possession of the draff to them, and there was no wrongful conversion of it of which they could complain. And so this case is unlike the case of Comstock agt. Hier (73 N. Y., 269), which is very much relied on by the learned counsel for the plaintiff. In that case Comstock was indorser of the note which it was claimed Hier had wrongfully converted, and it was held that Comstock was in such relation to the note that he could sue for a wrongful conversion thereof, or for the proceeds received upon the wrongful conversion thereof. The recovery was there upheld on the theory of a wrongful conversion of the note. But this " recovery cannot be upheld upon that theory.

The only other theory suggested for the maintenance of this action is that of mistake; and much can be plausibly and forcibly said in favor of this theory. It is certainly true that if the drawees had known what they now know, or if they had known that the proceeds of the draft were to he applied otherwise than upon the old draft, they would not have accepted or paid the draft. But were they so mistaken that they can reclaim the money voluntarily paid by them ? It is not every mistake that will lay the ground work for relief. It must be" a mistake as to some existing fact; not as to something to happen or to be done "in" the future. It must be a mistake as to some fact not remotely, but directly, bearing upon the act against which relief is sought (Dambmann agt. Schulting, 75 N. Y., 55). If it were the rule to relieve against mistakes as to remote, or what are sometimes called extrinsic facts, great uncertainty and confusion would attend business transactions. Here the draft was genuine, addressed to the drawees, who had authorized it to be drawn, and it was held by the defendant, which could lawfully receive payment thereof. There was no mistake as to the intrinsic facts. The facts that the 'drawers had not acted in good faith with the drawees, or had placed the draft and its proceeds beyond their control, so that the old draft might not be paid, were too remote. The mistake of the drawees was rather as to the application of the money paid by them, a future fact. If the defendant had received this money and applied it upon the old draft, the precise expectation of the drawees would have been met, and there would have been no ground of complaint.

It is believed that no case can be found which holds that a party paying money under the circumstances existing have been allowed to reclaim it upon the ground of mistake. The defendant’s case may rest upon principles decided in the cases of Justh agt. The National Bank of the Commonwealth (56 N. Y., 478), and Stephens agt. The Board of Education (79 N. Y., 188). In the Justh case one Gray borrowed plaintiff ’s checks for $40,000 upon forged collaterals. He took the checks and had them certified to be good by the drawee bank, and then deposited them with the defendant, which received the money upon them. In that case the plaintiffs clearly parted with their checks under a mistake as to the genuineness of the collaterals. If they had known that they were forgeries they would not have parted with the checks. But upon the assumption that the defendant had parted with no value for the checks or upon the faith of the checks, this court held that the plaintiffs could not recover the amount of the checks, treating them 'as money paid to the defendant. The decision was also put upon the ground that the defendant had parted with value for the checks, and thus rests upon' both grounds. In the Stephens ease one Gill obtained of the plaintiff a sum of money upon the security of a forged mortgage, and paid the money to the defendant upon an antecedent debt; and it was held that the plaintiff could not reclaim the money. These decisions and others like them do not rest, ' as has been sometimes supposed, upon the ground that money has no earmark, but upon grounds of public policy. As said by judge Andbews in the Stephens case, “ It would introduce great confusion into commercial dealings if the creditor who receives money in payment of a debt is subject to the risk of accounting therefor to a third person who may be able to show that the debtor obtained it from him by felony or fraudand if the plaintiff in that case had shown that the very money he loaned to Gill had been delivered to the defendant the decision must have been the same. In the case of Gammon agt. Butler (48 Maine, 344), the plaintiff gave her husband $100 in bills, to be by him carried and delivered to her children, and he paid the same money to the defendant upon an antecedent debt, and it was held that in an action for money had and received she could not recover, and the decision was based upon the same principles laid down in the cases of Justh and Stephens.

A large share of the business of the world is carried on by means of bills of exchange drawn upon persons liable to pay, or for the accommodation of the drawers, willing to pay them. They pass from hand to hand by indorsement or mere delivery, and are generally payable at places distant from the places where they are drawn. The protection and encouragement of trade and commerce, as said in the Maine case, and “ considerations of public policy and convenience, and the security and certainty in business transactions,” as said in the Stephens' case, require that when such a bill is paid to one who holds it in good faith and for value, he should not be called upon afterwards to account for the motley paid, perhaps at a distant time or place, after the accounts with the drawers have been settled and closed, upon proof that in transactions between the drawers and drawees of which the holder has no knowledge or means of knowledge, there has been some fraud or wrong, or mistake to the injury of the drawees.

If this money can be reclaimed, public policy is just as much contravened as it would be. if the money had been drawn from the drawees by the drawers, and by them paid to the defendant. If the drawers had received this money from the drawees to pay the old draft, and had used it to pay their antecedent debt to the defendant, it is conceded that the drawees could not have reclaimed it. How can it make any difference in principle that the money was paid to the defendant directly by the drawees upon the order of the drawers % Whether the money was paid in the one way or the other, the principles of public policy and convenience lead to the same decision.

It matters not that the defendant, not being a holder for value parted with, when it took the draft, could not have enforced it against the drawees, even after acceptance. That was true in the case of the check in the Justh case. If the defendant in that case had parted with no value at the time it took the checks from Gray, it could not have sued the plaintiffs there as drawers. Yet, after the plaintiffs, through the drawee bank, had paid the checks, it could not reclaim the money paid. Here the drawees could have refused to accept the draft, and they might have refused to pay after acceptance, and might probably have successfully defended an action .upon the draft. But having paid the draft, they must now look to the drawers, who made an improper use of the same, and who, in law, perpetrated a fraud upon them; and they cannot visit the consequences of that fraud upon the innocent defendant.

It is undoubtedly the rule in this state that one who signs commercial paper for the accommodation of another for a particular purpose, can defend when sued upon the paper by ;a person who took it .as security for or to apply upon an antecedent debt without parting with value at the time, by showing that the paper has been diverted from the purpose intended. This rule is an exception from the general rule of commercial law, which protects one taking such paper in good faith and for value against the equities or defenses of all prior parties to the paper (1 Parsons on Notes and Bills, 218). While this exception has been much assailed in other jurisdictions, and is not recognized in England or in the federal courts, or in the courts of many of the states of the union, it is believed that it more frequently than otherwise tends to just results. The holder of the paper in such cases is generally soon made aware of the defense, and can take measures to protect himself from harm. But it is carrying the exception one step further to hold that the accommodation signer of such paper can pay it, and then, at any time before the statute of limitations has barred his right, and after time has complicated or changed the relations of the parties, sue to recover back the money thus paid.

The facts seem to disclose another ground of defense to this action. The draft was of value to the defendant. It had the right in any event to hpld it and enforce it against the drawers, and the drawees could not reclaim the money paid and at the same time retain the draft. They should, before the commencement of the action, have demanded the money and tendered back the draft, and it is possible that a tender at the trial would be sufficient. As this point was not made on behalf of the defendant, we will notice it • no further and give it no weight in our decision.

In this discussion we have assumed that the defendant took this draft without notice of the purpose for which the drawees authorized it to be drawn. We are justified in this assumption by the undisputed evidence. If the case had been submitted to the jury and they had found that the defendant had such notice, the verdict would have been so far against the evidence that it would have been the duty of 'the court, upon application, to set it aside.

Our conclusion therefore is, that this recovery cannot be upheld, and the judgment should be reversed and a new trial granted.

All concur except Miller, J., dissenting; Folger, C. J., and Andrews, J., concur in result.  