124

Warner v. Armstrong, Receiver.

Defendant Armstrong filed a motion to dissolve the restraining order issued in this case on the ground "that the facts stated in the petition do not constitute a claim for equitable relief." As the only relief sought is equitable, the motion is, in effect, a demurrer to the petition.

The petition states two causes of action. The first in substance is, that Warner being liable upon a draft due in New York City for $4,067.62, forwarded his check on the Bank of Monroe of Rochester, N. Y., for that amount to W. J. M. Gordon to pay the same. Gordon deposited the check in the Fidelity National Bank a few hours before it closed its doors and when its officers knew that it was hopelessly insolvent. Gordon received from the bank at the same time a draft of the Fidelity on the First National Bank of New York, for $3,200.00, when, as the officers of the Fidelity knew, it had only a fraudulent and fictitious balance in the First National Bank, and its account was really at the time of the making the draft largely overdrawn. The receipt of the deposit and the issuance of the draft under the circumstances, are alleged to be a fraud upon plaintiff. Gordon forwarded the draft for $3,200.00 to New York, payment was refused, protest had, and the draft returned to Gordon, who presented it to defendant Armstrong, the receiver of the bank, and demanded a return of the check of plaintiff upon which plaintiff had stopped payment. The demand was refused. Gordon becoming insolvent this draft passed into the hands of defendant Hyman, his trustee for the benefit of creditors, who still holds it and refuses to deliver it to plaintiff except upon order of court. The receiver is about to bring suit upon the check against plaintiff.

The second cause of action is distinct from the first. Warner, the plaintiff, is liable upon a draft for $4,249.00 which he accepted for the accommodation of Gordon, and which Gordon discounted at the Fidelity Bank. The draft fell due the day after the bank closed its doors. When the bank failed Gordon had a large balance to his credit on deposit. Gordon is insolvent. Plaintiff is really only a surety upon the draft due the bank, and as such seeks to avail himself in equity of the set-off which his principal Gordon would be entitled to against the bank. The receiver threatens to sue plaintiff on this draft in New York where Gordon and his trustee cannot be made parties, and where therefore this equitable defense and setoff cannot be used by plaintiff:

On his first cause of action plaintiff prays that the receiver be enjoined from bringing suit upon the check of plaintiff; that Gordon's trustee be compelled to deliver First National Bank draft to the receiver, and that the receiver be compelled to surrender the check to plaintiff.

On his second cause of action plaintiff prays that the receiver be enjoined from suing plaintiff on his acceptance in New York, and that he be compelled to allow plaintiff to set-off Gordon's deposit against his liability to the bank on his accept

ance.

An order was issued temporarily restraining the defendant as prayed. It is on a motion to dissolve this restraining order that the questions for decision arise.

TAFT, J.

By the allegations of the first cause of action Warner entrusted his check to Gordon as agent to take up his paper. As between Gordon and Warner the money represented by the check was Warner's until it was applied as directed. A fraud committed on Gordon with reference to this money was a fraud upon Warner, and I do not see why, by the ordinary rule of principal and agent, Warner may not avail himself of every remedy against the bank open to Gordon, had he been dealing with his own money.

We come to the inquiry what was the bank's title to the check deposited by Gordon? As Gordon was credited with the check as cash, the title to the check was transferred to the bank. See Metropolitan Bank v. Lloyd, 90 N. Y., 537. In re Bank of Madison, 5 Biss.

But when the bank received the check it was utterly insolvent as its officers knew and it issued in part return of the check'a draft on a bank where it had no funds, as its officers well knew. These two facts are strong evidence tending to show that the officers received the check with the intent not to return the value of same on call, which is equivalent to intent to defraud. See Talcott v. Henderson, 31 O. S., 162. And such intent on the part of the officers managing the bank charges the bank with the same fraudulent intent. See Cragie v. Hadley, 99 N. Y.,

31.

It is objected that no fraudulent intent is alleged, but that there is a mere allegation of law that a receipt by the bank under the circumstances was a fraud. I am inclined to think this a well founded objection. The facts pleaded are strong evidence of the ultimate fact, i, e., the fraudulent intent of the bank, but do not make

Superior Court of Cincinnati.

124

up for a lack of the proper allegation, which would be that the bank and its officers received the check with intent to defraud Gordon. Taking it for granted that the petition can be amended to meet the objection, what would the right of the plaintiff under that allegation be? The title of the bank to the check would be voidable by Gordon or Warner on a tender of the draft within a reasonable time, and a notice of a rescission of the contract of deposit and a demand for the check. Such tender, notice and demand are all alleged, and give to Gordon, or his principal, Warner, the right to recover the check from the bank or its receiver. See Cragie v. Hadley, supra.

The check is a negotiable instrument in the hands of the receiver whose title thereto has been avoided. This is a well established ground for the interference of a court of equity to restrain a suit upon the instrument and to compel a surrender of it. It is not a sufficient answer to a prayer for such a remedy that the ground upon which the instrument has been avoided is a good defense at law to a suit thereon, because remedy by defense at law is not entirely adequate, for the check being transferable may become the foundation for other suits, and the person liable thereon be greatly harassed. If the instrument is voidable and has been avoided, the fraudulent holder can retain it for no good purpose, and equity will deprive him of any opportunity to use it.

High on Injunction, section 67; Story's Equity Jurisp., sections 698-700; Ferguson v. Fisk, 28 Conn., 501; Hamilton v. Cummings, 1 John., ch. 516.

It is clear, therefore, that were the bank a natural person, the state of fact alleged would justify this application to a court of equity. It is claimed, however, that a different rule applies to national banks which have passed into the hands of a receiver after the fraud because of section 5242 R. S. U. S. of the banking act, which forbids preferential transfers or assignments, and enforces equality of distribution among creditors; that the rights of creditors having intervened, the equity against the bank is lost as against the equity of all creditors decreed by positive enactment. The obvious answer to this objection is clearly pointed out in Cragie v. Hadley, supra, and is that where the defrauded party seeks to rescind and recover back his deposit, he claims not under any transfer or assignment from the bank, but under his original title, and so does not claim in contravention of the section cited. Counsel for the receiver, however, have cited some authorities which it is claimed are opposed to this view. In Bank v. Receiver, 15 Fed., 858, Judge Wallace held that a receipt of a draft and collection of it by a bank, after its insolvency was known to its officers, was a fraud, but that equity could grant no rescission and redelivery, because the proceeds of the collection had been mingled with the general funds of the bank, and as money has no earmark, the equities of the general creditors in the fund were as great as those of the plaintiff. In the case at bar the receiver holds the check itself, which is, of course, capable of identification and which therefore, clearly distinguishes this from the case cited. In the cases of St. Louis, etc., Ry. Co. v. Johnston, 27 Fed., 243; Metropolitan National Bank v. Lloyd, 90 N. Y., 530, and ex parte Jones, 77 Ala., 330, the pleadings did not raise any issue of fraud between the bank and the depositors. In the last case a customer of the bank bought a draft on New York with money on deposit. Before the draft was presented, the bank made an assignment and the assignee notified the N. Y. Bank to stop payment. Plaintiff sought to rescind the contract of purchase of exchange and to be restored to her right as a depositor because the bank was insolvent. It appeared that there were funds in New York to meet the draft. It was held that there could be no such relief in the absence of proof that the bank intended to defraud or had no reasonable expectation that the bank in New York would pay the draft. Under ordinary circumstances notice to stop payment on a draft would give the holder the right to rescind the contract by which it was delivered to him, but in this case, by the assignment, rights of creditors intervened before any right of plaintiff to rescind accrued, and defeated its exercise. If the right to rescind had been based on fraud in the inception of the contract, as in the case at bar, the right to rescind would have accrued at once, and the creditors would have taken the assignment subject to this right. This is the distinction taken by the Alabama court, which makes the authority rather against the receiver than in his favor in the case at

bar.

It is objected by counsel for receiver, that by compelling him to litigate the validity of his title to the check in this jurisdiction he is deprived of the right to make the Bank of Monroe, of Rochester, N. Y., a party against whom he has a right of action on the check. In Kahn v. Walton, 46 O. S., 195, our Supreme Court has re cently decided that a bank check is a revocable order for the payment of money, creating no right of action against the bank in favor of the payee, until it has accepted it.

124

Warner v. Armstrong, Receiver.

The same rule has been laid down in Florence Mining Co. v. Brown, 124 U. S., 385; Bank v. Millard, 10 Wallace, 152; First National Bank v. McMichael, 106 Pa., 460; Coates v. Doren, 83 Mo., 637, and ex parte Jones, 77 Ala., 330. And this is the holdlng in New York, where it is proposed to bring the suit against the bank. Resley v. Phoenix Bank, 83 N. Y., 324. In this view, the receiver could not recover on the check from the bank of Monroe, whatever may be Warner's liability thereon, and therefore the receiver loses nothing by not being able to bring the bank in as a party.

In order that the receiver as representative of the bank may be put in statu quo it is necessary that he should be given the draft for $3,200.00 now in the hands of Hyman, trustee. Hyman refuses to deliver the draft. This is another ground for an equitable remedy to save a multiplicity of suits, and to bring all the parties interested into an adjudication of their rights in one hearing. The facts stated as a' first cause of action, entitle plaintiff to the equitable relief he seeks.

(Upon the second cause of action, the court held that upon the facts set out, the plaintiff was entitled to set-off. This feature of the case was carried to general term on error, where it was more fully considered, and the same conclusion reached. The opinion of the general term on this point will be reported. It is therefore deemed unnecessary to include in this report the reasons of the court at special term for upholding the right of set-off.) See post, 46 O. S., 195.

The objection which has been most strongly urged to the temporary restraining order granted herein, is that under section 5242, R. S. U. S., there is no power in a state court to issue an injunction before judgment against a national bank association, and consequently none against a receiver.

The clause referred to is as follows:

"No attachment, injunction or execution shall be issued against such association or its property before final judgment in any suit, action or proceeding, in any state, county or municipal court." It has been a matter of dispute whether this restriction applied, except in cases where the bank was insolvent. The Supreme Court of the United States has settled the question in Pacific Bank v. Mixter, 124 U. S., 721, by holding that the restriction is general, and does not depend upon the financial condition of the bank. In that case the court says that remedy by preliminary injunction against the banks, was ample in the U. S. courts, until the amending act of 1882 was passed, when, by the proviso of sectiou 4, (22 U. S. Statutes at Large, 163,) all laws giving the U. S. courts any different jurisdiction from that had by them over state banks, is taken away. The court plainly intimates that this takes away all power to restrain banks temporarily in any court. It is claimed that an act which so derogates from the ordinary legal remedy, should be strictly construed, and should not be held to extend to receivers of national banks, who, while they represent the creditors and the bank, are really officers of the United States engaged in an administrative capacity in settling up the affairs of an agency of the government. It has several times been decided that the proviso of section 4 of the act of 1882, does not extend to receivers, although it does in terms apply to banks. Mead v. Platt, 17 Fed. Rep., 509; 26 Fed. Rep., 677. The expression of prohibition is, however, against an injunction against the bank or its property. It is sought at bar to enjoin the receiver from enforcing the ordinary property rights of the bank, to which he has succeeded for the benefit of the bank and its creditors. In the case of Com. Exch. Bk. v. Blye, 101 N. Y., 303, where it was sought to apply this prohibition to an action akin to our replevin, against a receiver, no question was raised in the argument or in the opinion that it was not as applicable in favor of a receiver as in favor of the bank, although the particular form of action was held not to be within the remedies prohibited. While I should be glad to find some loophole for escape from what the U. S. Supreme Court suggests is a failure of legislation, I do not think the one urged by counsel is satisfactory. In view, however, of the clear equity of the petition, though I am obliged to dissolve the preliminary injunction, I shall give the plaintiff an opportunity to try his case within ten days, so that he may obtain an injunction after judgment, if the proof shall sustain his allegations. Motion granted.

Bateman & Harper, for plaintiff.

Kittredge & Wilby and Burnet & Bruce, for defendant.

Fayette Common Pleas.

126

126

HUSBAND AND WIFE.

[Fayette Common Pleas.]

JACKSON RANKIN V. EUNICE Rankin et al.

Where a husband has conveyed lands to his wife without valuable consideration, and under such circumstances that the presumption of law arising from the relation of the parties, that an absolute gift was intended is rebutted, if the transaction be questioned the burden is upon the party claiming under the deed to show that it was not obtained by an abuse of the relation of trust between husband and wife.

HUGGINS, J.

The plaintiff in this case seeks to set aside a deed made by him to his wife, the defendant Eunice Rankin, and also to set aside a judicial sale of the premises conveyed by the deed, such sale having been made upon a judgment taken upon a cognovit given by Eunice Rankin to the defendant Craighead, the defendant Holland being the purchaser.

The plaintiff Rankin and his wife Eunice are colored people. They have a large family of children, some of whom are yet small. Some years ago Rankin bought the premises in question, taking the title to himself, and by his labor paying the purchase money in installments from time to time, except a small mortgage incumbrance on the land when it was bought. He is shown to be an industrious man. His wife Eunice had no separate means. She contributed nothing to the purchase except by making a home for Rankin and the family by her household labors. Rankin improved the property, making it a somewhat comfortable home for him and his family in their station in life. He had no other property except some stock, including horses, and some farming implements. For some reason, Eunice became anxious to have a deed for the home, and importuned Rankin until, as he says, he consented to make the title over to her. This was done by Rankin and wife making a deed to a third person, and he a deed to her, no consideration being paid. Sometime after that, Rankin left home for a time, because of a criminal prosecution against him. He came back, however, and was tried and acquitted. While he was gone, Eunice, being pressed for payment of an attorney fee incurred in the transfer of the title, borrowed thirty dollars of Craighead to pay the attorney, who in turn borrowed the sum of Holland to lend to her. Craighead and Holland both lived in the vicinity and knew in a general way of Rankin's affairs. To secure this loan, Eunice gave Craighead a mortgage on a cow then in her possession, which had been bought by Rankin. Condition being broken Craighead took the cow. About this time Eunice left her husband, and has ever since refused to live with him, without cause so far as appears. Rankin having returned, brought a replevin suit against Craighead for the cow, which suit, upon final trial, went in Rankin's favor. He is still living upon the premises in question with his minor children. Both Rankin and his wife are entirely illiterate, and she is shown to be of feeble mind.

Craighead having failed in the replevin suit, got from Eunice a cognovit, not only for the loan of the thirty dollars and interest, but for the costs and expenses of the replevin suit, in all about one hundred and ninety-five dollars. He has not paid such costs, or his debt to Holland. It does not appear that such costs can be made from him on execution, or that he is good for the loan. A judgment was entered on the cog.

novit in favor of Craighead. On this judgment execution issued and was levied upon this land as the property of Eunice Rankin. A sale was had, Holland being the purchaser, and the sale was confirmed. At this stage, and before deed by the sheriff to Holland, Rankin brings this suit, claiming to be the real owner of the property; that the title was a trust in his wife, and that Craighead and Holland have conspired with her to defraud him of his home.

Eunice Rankin does not answer. Holland and Craighead answer, denying the trust,-denying that they conspired as claimed, and denying knowledge that Rankin paid for the property.

The facts I have stated should, I think, impress any candid mind that the result of these transactions is a wrong to the plaintiff Rankin. Nor does Craighead's conduct commend itself to the conscience of a chancellor. When the case was tried, however, I was unable to see how this wrong could be remedied. Yet where a wrong has been done of this kind the law professes to and should give a remedy. Considering this I have been much interested in the case, and have examined it with

some care.

It is urged that no express trust has been shown-which I think is true. It is urged that the deed being to a wife the law presumes it to be a gift to her, and the gift being executed the property was hers and liable for her debts. But if this view shall prevail the result is that the home bought and paid for by Rankin, and by him deeded to his wife for nothing, will be sold and the proceeds turned over to Craighead in payment of a judgment founded upon a cognovit got from a feeble minded negro woman who can neither read nor write, and which had no legal consideration except in small part. It seems to me that this case is such that the wholesome rule laid down by Judge Swan for justices of the peace, and which is a good rule for any court, may well be applied.

"The first inquiry of the justice should be, what is just and equitable. And if a rule of law is pressed upon his consideration which in its application to the case, will do manifest injustice to the parties, the justice should disregard the rule, unless it is clearly and indubitably applicable." Swan's Treatise, Chap. XVI.

In most cases, however, when rules of law are urged which would in their application work injustice, the trouble is, not in the law but in imperfect knowledge of its principles, and their proper application. A careful examination will usually, and should always, harmonize the law and the justice of the cause, and I think will do so in this case.

It is a rule of equity that when land is bought and the title taken in the name of the wife of the purchaser, the presumption is, because of the relation of the parties, that a gift was thus made by the husband to the wife. Perhaps this rule applies when the land is conveyed after the purchase, the husband having taken the title to himself. But such presumption is not conclusive and is "a circumstance of evidence" only. Testimony will be heard upon the other side, and "the whole question is resolved into one of intent." 1 Perry, sec. 143 et seq.

"Where a person purchases property with his own funds, and places the title in the name of a stranger, the legal presumption is that he made such purchase for his own use and the property is held in trust for him.

"But where such purchase and conveyance is made by a man to a member of his own family, the presumption is that the property is intended as a gift or advancement."