
    The American National Bank, Plaintiff, v. Almond J. Warren et al., Defendants.
    (Supreme Court, Monroe Special Term,
    July, 1916.)
    Negotiable instruments — non-negotiable paper — banks — actions — bills, checks and notes — pleading.
    Non-negotiable paper may be bought and sold and ownership thereof passed as effectively as in ease of negotiable paper.
    
      The holder of non-negotiable paper, as well 'as a holder not in due course of negotiable paper, is under no disability regarding it except that he does not take it free from possible defenses.
    A member of the firm of B. & B. which was among the depositors of plaintiff, a bank in the state of Michigan, presented to it for discount a draft payable to the order of his firm drawn upon defendants W. & S., to which was attached a non-negotiable bill of lading for a car-load of merchandise .shipped by F. Bros, of a place in the state where the plaintiff bank was located to defendants W. & S. B. & B. were given credit for the face of the draft in their pass-book by plaintiff which also gave them the -same credit on their account on its individual ledger. The draft was forwarded by plaintiff to a bank in the city of Rochester, 1ST. Y.,. with instructions to hold for the arrival of the car and to wire non-payment. On the arrival of the car the draft and the bill of lading were presented to the drawee who accepted the same and gave to the correspondent bank a certified check in payment receiving at the same time from said bank the draft and bill of lading. W. Sé S. immediately brought an action against B. & B. for breach of warranty, obtained a warrant of attachment and delivered it to the sheriff of Monroe county who by their direction levied upon the proceeds of the draft still in the possession of the correspondent bank. B. & B. still continued to do business with plaintiff and at no time prior to such levy and notice thereof to it was their account with plaintiff less than the amount of the. draft though at some time later their account was below that amount and was occasionally overdrawn. In an action brought for the release of the proceeds of the draft from the levy under the attachment and to recover the resultant damage, held, that all parties having treated .tlm action as one in equity and the case tried on that theory the question whether plaintiff had an adequate remedy at law, which was not pleaded, was waived by defendants who were also estopped from making a demand for a jury trial.
    That the legal effect of the whole transaction was that plaintiff had taken over and become the owner of the draft with the bill of lading as collateral security which in the circumstances might lead to the defeat of any attempt on its part to collect the same.
    That the draft having been accepted and paid by the drawees and the security which plaintiff held as collateral having been surrendered to them, the proceeds of the draft were the property of plaintiff and the attachment thereof as the property of B. & B. could not be sustained.
    While plaintiff under well-understood banking rules might have charged the amount of draft back to B. & B. and thus" protected itself from loss it was not bound so to do' and its election as to one of two remedies in no way imported bad faith in its dealings with the draft in question.
    The complaint being based upon the theory that plaintiff was the owner of the proceeds of the draft and that an attachment thereof could not lie in behalf of the drawees in their action against B. & B. plaintiff’s mistaken belief that it was a bona fide owner and holder of the draft itself reached only the quality of its ownership and in no way militated against the general pleading showing its right to recover.
    Action upon a negotiable instrument.
    Medcalf, Averill & Tompkins, for plaintiff.
    Arthur T. Pammenter, for defendants.
   Sawyer, J.

This action was brought for the release of the proceeds of a draft collected by the Lincoln National Bank of Rochester, from a levy thereon made by the defendant Brown, as sheriff, under a warrant of attachment issued in an action brought by the defendants Warren & Smallridge against the copartnership of Burkholm & Benson, and to recover damages resulting from the levy.

The facts, so far as material, are as follows:

Plaintiff is a national bank located at Benton Harbor, Mich. Among its depositors was the copartnership of Burkholm & Benson, produce dealers of the same town.

On September 13,1915, Mr. Benson of this firm presented to the bank for discount a draft for $554.85 payable to his firm’s order, and drawn upon the defendants Warren & Smallridge, to which was attached a non-negotiable bill of lading for a carload of peaches shipped by Friday Bros., of Colomo, Mich., to Warren "& Smallridge. Bnrkholm & Benson were given credit for the face of the draft in their passbook by plaintiff, who, also, gave them the saíne credit in their account on its individual ledger. Plaintiff then forwarded the draft with the bill of lading attached to the Lincoln National Bank of Rochester with instructions to hold for the arrival of the car and to wire nonpayment. On the arrival of the car the draft and bill of lading were presented to the drawee, the defendants Warren & Smallridg-e, who accepted the same and gave to the Lincoln National Bank a certified check for $554.85 in payment thereof, receiving, at the same time, from said bank the draft and bill of lading. The defendants Warren & Smallridge immediately brought action for breach of warranty against Bnrkholm & Benson, procured a warrant of attachment and delivered same to the defendant Brown, as sheriff of Monroe, county, N. Y., who levied under their direction upon the proceeds of the draft still in the possession of the Lincoln National Bank. Bnrkholm & Benson continued to do business with the plaintiff and at no time prior to such levy and notice thereof to it was their account with plaintiff less than said sum of $554.85, although it appears that, at some time later, their account was below that amount and was occasionally overdrawn.

The plaintiff contends that it is the owner of the proceeds of this draft, while the defendants Warren & Smallridge claim that such proceeds belong to Burkholm & Benson.

In his brief filed after the close of the trial, defendants’ counsel for the first time has raised the questions, that plaintiff has an adequate remedy at law,' and that the action is not an equity action, but that defendants were entitled to a trial by jury of the issues herein.

It does not seem necessary to determine whether or not this is so. That plaintiff has an adequate remedy at law is not pleaded, and all parties have, from the beginning, treated this as an action in equity and proceeded to and through the trial upon that theory. Under such circumstances, defendants have waived both questions and are estopped from, at this late day, making a demand for trial by jury. Town of Mentz v. Cook, 108 N. Y. 504; Lough v. Outerbridge, 143 id. 271-277; Code Civ. Pro., § 1009, subd. 4.

By this transaction plaintiff became indebted to the firm of Burkholm & Benson in the sum of $554.85, and, as an offset to such indebtedness became the owner of the draft in question and, as a collateral security thereto, of the goods represented by the' bill of lading which was attached. Albany Co. Bank v. People’s Co.-O. Ice. Co., 92 App. Div. 47; American T. & S. Bank v. Austin, 25 Misc. Rep. 454; Goetz v. Bank of Kansas City, 119 U. S. 551; Commercial Bank v. Pfeiffer, 108 N. Y. 242; Pers. Prop. Law, § 216. See, also, the Michigan Act.

In the last cited case the rule is laid down by Chief Judge Ruger, on page 250, in the following emphatic language: It is settled beyond dispute in this state, that the discount of a draft drawn by a consignor upon his consignee which is accompanied by the delivery of - a bill of lading to the party making the advance, passes to such party not- only the legal title to such property, but, in the eye of the law, the transfer of the bill of lading is regarded as an actual delivery and an actual change of possession of the property.”

I am not unmindful of that fact that in the case now under consideration physical consignment of the goods was made at Colomo, Mich., by the firm of Friday Brothers. They were the vendors thereof to Buckholm & Benson and in the shipment to Warren & Smallridge acted under that firm’s instructions and as its agent, and Burkholm & Benson were the real consignors.

The legal effect of the whole transaction was that plaintiff had taken over and become the owner of business paper with its collateral security under circumstances which might lead to the defeat of any attempt on its part to collect same. Such purchase did not, however, make the bank a party to the transaction between the original parties, nor subject it to any litigation in that behalf, except such as it might bring upon itself in an attempt to enforce payment of the obligation it had purchased. Warren & Smallridge had no, nor could have any, right of action against plaintiff for breach of warranty in the sale of these peaches. Their claim and all their claim for loss was solely against the firm of Burkholm & Benson. They might have refused to accept the draft; they might have accepted it and then refused payment; in either of those events the defense of failure of consideration because of the breach of warranty would have been available to them against plaintiff. There the bank’s danger ended.

' Non-negotiable' paper may be bought and sold and ownership thereof passed as effectively as in the ease of negotiable paper. "The holder of non-negotiable paper' and, equally so, a holder not in. due course of negotiable paper .is 'under • no disability regarding it except that he. does '.not. take it free .from possible defenses,

• This draft was however both accepted and paid by Warren & Smallridge, and the security which plaintiff held as collateral' .thereto"' surrendered to them. That its proceeds were the property of plaintiff seems beyond dispute and their attachment as the property of Burkholm and Benson cannot be sustained.

My attention has been called to certain decisions in the courts of other states as bearing upon the rights of the parties herein (Tapee v. Varley Wolter Co., 184 Mo. App. 470; Tolerton v. Anglo Col. Bank, 112 Iowa, 706; Leonhardt v. Small, 117 Tenn. 157), but it does not seem profitable to here discuss them at length. It is sufficient to say that generally they sustain the proposition hereinbefore announced, that a discounting bank does not assume the liabilities of its customer, except in so far as same may be used as a defense against the paper itself. I am not aware of any decisions by the courts of this or any other state to the effect that the proceeds of a draft paid to a holder not in due course, he being free from fraud or actual bad faith, can be still reached by the drawee for demands against his drawer. Nor do I think such is the law. It is not claimed that plaintiff had notice of any defect in the goods described in the bill of lading nor is there any proof of its bad faith in the transaction. Quite likely it could, under well understood banking rules, have charged the amount of this draft back to Burkholm & Benson and thus protect itself from loss. We are not concerned with its reason for not so doing. It had two remedies and has made an election as to which it would adopt. To my mind that election in no way imports bad faith in its dealings with this paper.

The amended complaint herein is based upon- the theory that plaintiff is the owner of the proceeds of the draft, in question and that an-attachment thereof could not lie in behalf of Warren & Smallridge in their action against Burkholm & Benson. Plaintiff’s mistaken belief that it was a bona fide, owner and holder of the draft itself reaches only the quality of its ownership and in no way militates against the general pleading showing its right to recover.

The demand that plaintiff be awarded damages to cover its legal expenses incurred herein is somewhat unusual. It is true that in actions founded upon bonds or undertakings in attachment proceedings legal expenses are held to be legitimate items of damage.

This, however, is founded in the nature of the obligation sued upon which must provide in case of default for a reimbursement of all costs and damages. Code Civ. Pro., § 640.

Ordinarily a successful litigant can have no recovery for such damage beyond the costs provided by statute tp be taxed, and there seems to be nothing here where that contractual relation between the parties does not exist to take the case out of the usual course.

Judgment for the release of the attached moneys, with interest, to plaintiff is directed, with costs.

Judgment accordingly.  