Casey v. Cavaroc
APPEAL from the Circuit Court of the United States for the District of Louisiana.
The National New Orleans Banking Association, an organization formed under the National Banking Act of 1864, failed and suspended payment on the 4th of October, 1873, and on the 27th of that month was placed in the hands of a receiver, under the fiftieth section of the act. At or about the time of the failure, Charles Cavaroc, the president of the bank, took therefrom certain bills and notes to the amount of $325,011.26, and delivered the same to his firm of C. Cavaroc & Son, who claimed to hold them as agents for the Societe de Credit Mobilier of Paris, by way of pledge to secure said society for certain acceptances of bills drawn by the bank in July previous. The bill in this case was filed by the receiver to recover possession of said securities, alleging that they were delivered by the bank to Cavaroc & Son, in contemplation of the insolvency of the bank, not by way of pledge, but with a view to give a preference to Cavaroc & Son and the Credit Mobilier over other creditors of the bank, contrary to the provisions of the fifty-second section of the banking act. The defendants, Cavaroc & Son and the Credit Mobilier, by their several answers, deny that the securities were delivered by way of preference in contemplation of the insolvency of the bank, and insist that they were actually pledged to the society by virtue of a distinct agreement, as a consideration and security for the acceptance by if of bills drawn by the bank to the amount of one million francs; which bills were drawn in pursuance of said agreement, and were negotiated by the bank for over $218,000, and were duly accepted by the society upon the faith of the pledged securities. The answers aver that at the time of this transaction the bank was in good credit and standing.
The parties having gone into proofs, the following facts were shown:--
From May, 1873, until the time of its failure the bank was in a weak financial condition, and constantly becoming weaker. The cashier testified that on the 31st of May it had hardly any funds to meet current checks, whilst the amount due to depositors was $680,775. A deposit of $25,000 was opportunely made by a customer on that day; but the president, Cavaroc, was so apprehensive of immediate suspension, that he refused to let it be used, telling the paying teller that if any thing should happen, he did not want the depositor to lose this money. By getting temporary relief from the other banks of the city, and from the New Orleans Insurance Association, and other large loans, it kept its doors open until the 4th of October, though, in connection with most of the other banks of New Orleans, it ceased, from and after the 24th of September, to pay cash, except for very small amounts, paying only in clearing-house certificates, which it obtained by depositing collaterals with the trustees of the clearing-house. Although it held notes and bills receivable amounting to about a million of dollars, a large portion of these were comparatively worthless, being either protested or renewed at maturity, and the makers constantly failing; and all of them, of any value, being pledged, or agreed to be pledged, for its various loans. Although this condition of the bank was not generally known, and presumably unknown to the Credit Mobilier, yet suspicion of its solvency began to be entertained by many of the business men of New Orleans as early as June or July, and its stock became almost totally unsalable in the market.
In the early part of July, 1873, Charles Cavaroc, Jr., a member of the New Orleans firm of C. Cavaroc & Son, being in Paris on behalf of the New Orleans National Banking Association, entered into negotiation with the Credit Mobilier for procuring the acceptance of the latter for the accommodation of the bank; and, on the 11th and 12th of July, the said negotiation was concluded in the form of a letter addressed by Cavaroc to the society, and of an answer thereto by the latter. The following are the material parts of this correspondence. Cavaroc, in his letter dated July 11, 1873, says:--
'The verbal agreements entered into between us relative to this operation can, we think, be thus resumed:--
"In order to benefit by the difference in the rates of exchange between the summer months and end of the year, time when the large shipments commence, the Society of the Credit Mobilier authorizes the New Orleans National Banking Association to draw upon it, and binds itself to accept these drafts at ninety days, up to 1,000,000 francs.
"The drafts made under these conditions shall be renewable under the same conditions, but it is expressly specified that, ten days before maturity, the Society of the Credit Mobilier shall be covered by Mr. Cavaroc, president, to the amount of the payments to be made.
"The funds realized from these emissions shall be used by the bank against guaranties and securities of the first class, which shall be deposited by the bank with the firm of Messrs. Cavaroc & Son, which shall be the depository thereof, and advise the Credit Mobilier of such deposit.
"The bank shall guarantee the investment of these sums, and the interest shall be carried to the credit of the joint account, at the rate of seven per cent per annum.
"This account shall in no manner allow any commission or privileged charge on either side,-there shall figure only brokerage, stamps, and divers charges, really and honestly incurred by either side.
"The accounts shall be stated at the closing of each operation.
"Profit and loss shall be equally divided between the Credit Mobilier and the New Orleans National Banking Association."The answer of the society, dated on the 12th of July, 1873, repeats this contract, and accepts its terms.
During the negotiation, on the 11th of July, Cavaroc and the Credit Mobilier, respectively, despatched the following successive telegrams to the bank in New Orleans:--
1. 'Bank exchange one million, ninety days' sight, Societe de Credit Mobilier, giving best securities deposited with house.
2. 'Defer drawing, the agreement is not yet completed.
(Signed) 'CREDIT MOBILIER.'
3. 'Draw bank one million, ninety days' sight, Credit Mobilier accepting our guarantee.
In pursuance of these advices, on the 12th of July the bank drew its bills on the Credit Mobilier to the aggregate amount of one million francs, and negotiated them through Schuchardt & Co., of New York, realizing therefrom $218,454.34. The bills were accepted by the society in due course, and were afterwards paid by it, no funds being provided by the bank for that purpose.
The answers allege that in this transaction Cavaroc & Son acted as the agents of both parties. The answers further allege that the securities in question were delivered by the bank to Cavaroc & Son, for the Credit Mobilier, in pursuance of the agreement; that a portion thereof, to the nominal amount of $220,021.41, a list of which is contained in a schedule annexed to the answer of the society, marked 'Exhibit B,' were delivered on the day the drafts were drawn, to wit, July 12, 1873; and that these not being deemed sufficient, another deposit, representing about $100,000, was made a few days afterwards; that some portion of these securities coming to maturity and being paid, Cavaroc & Son allowed the bank to receive the cash paid thereon, upon other securities being given equal thereto, in lieu thereof.
It was proved that the securities were delivered, or pretended to be delivered, as stated; but the evidence as to the time and manner of the delivery, and the manner in which the securities were afterwards treated, presented serious questions for the consideration of the court. It was evident that the identical securities specified in 'Exhibit B' could not have been delivered as early as the 12th of July, because they were dated and discounted after that day, and 'Exhibit B' itself was not made out until the nineteenth day of August. There was some evidence that securities to the amount of this schedule had been delivered to Cavaroc & Son at or soon after the twelfth day of July, and that those named in the exhibit had been substituted for them as they severally became due, and were renewed, or paid, as stated in the answer. The other securities, amounting to about $100,000, could not have been added until after Aug. 19, when 'Exhibit B' was made out, or they would have been included therein. This list, contained in 'Exhibit B,' was made out for the purpose of being transmitted to the Credit Mobilier. A letter from C. Cavaroc & Son to the society, bearing date Aug. 19, 1873, was exhibited in evidence, with which, as Cavaroc, Sen., testified, a copy of the list 'Exhibit B' was forwarded to the society. It contained the following passage:--
'If we have not sent you, at first, the memorandum of the valuables we have received from the bank, to guarantee our house and yourselves, it is because the subsequent despatch of our son gave us to understand that the operation was made under our guaranty, and we had ourselves taken these valuables. But we think it more just that we should not only transfer you this deposit, but that we should give you the details of these notes, which are all of the first class.
'As soon as certain of them will mature, we will take care to replace them by others, and will advise you.'
A letter from the society to the bank, dated Sept. 5, acknowledges the receipt of this letter of Cavaroc & Son, in the following terms:--
'By their letter of the 19th of the same month, Messrs. Cavaroc & Son, of your city, have sent us the memoranda of the valuables which you deposited with them to secure your drafts on us. Said valuables amount together to $220,021.41, which is well.'Precisely when the additional $100,000 of securities were added to the first lot does not appear; but Charles Cavaroc, the president of the bank, testified that it was a few days after the delivery of the latter.
But a more serious question related to the manner in which the securities were delivered and disposed of. The evidence on this point was to the following effect: Charles Cavaroc, Sen., the president of the bank, acting as agent of both parties, directed the discount clerk of the bank, who had charge of its portfolio of notes and bills discounted, to select the securities for the Credit Mobilier. They were selected accordingly to the amount of $220,021.41, and placed in an envelope by themselves, and handed to Mr. Cavaroc, for Cavaroc & Son. He handed them to the cashier of the bank for safe-keeping. But, as some of the securities soon matured, they had to be taken out of the envelope for collection; and Cavaroc had them collected, or renewed, in the usual manner by the discount clerk. The trouble of going to the cashier whenever a note became due to get it out of the envelope, after a few days induced a change, and the securities were handed back to the discount clerk, in the envelope, in order that he might more conveniently attend to their collection and renewal. When any of them were paid, the money was taken and used by the bank, and other notes were substituted in their place. When renewed, the new note took the place of the old. On one occasion, quite a large amount of the notes was exchanged for others, because more available in some other transaction of the bank. The entire lot, however, subject to this exchange of individual securities, appears to have been kept in the envelope by itself. In this manner the notes were kept in the bank until its failure on the 4th of October, when Mr. Cavaroc took possession of the package, and thereafter it was kept in the office of his firm. At the same time, the indorsement of the bank was placed on the several securities, which had not been done before. Lists of the securities contained in the envelope had been made out from time to time,-the last being made on the 4th of October, when they were finally removed from the bank. A copy of this list is annexed to the Credit Mobilier's answer as 'Exhibit C.'No entry was made on the books of the bank of this transaction with the Credit Mobilier, except that the bills drawn on it were duly entered amongst bills payable; and the Credit Mobilier was credited with the amount, which was put down amongst the liabilities of the bank, and so appeared in all the monthly statements, beginning with the 1st of August. The pledge of securities was not noticed. These all remained on the portfolio of bills discounted, as before, and their amount continued to be represented in the daily and monthly statements, without any note or memorandum to show that they had been pledged. So far as the public, and those with whom the bank dealt, could perceive, the bank continued to have possession and control of all the securities in its own right, and they all appeared to be equally liable with the other assets to the claims of all the creditors.
The Circuit Court rendered a decree dismissing the bill of complaint, and from that decree the receiver appealed.
Mr. Thomas Allen Clarke in support of the decree.
1. The pledge is valid, and, being of negotiable paper, no other formality than delivery is required. Act of La., 1852, p. 15, sect. 1; re-enacted 1855, p. 348; Rev. Civil Code, 3158; Rev. Stat., sect. 2905. The effect of revisory legislation is stated with clearness in State v. Holmes, 11 La. Ann. 439, State v. Brewer, 22 id. 273, and State v. McCort, 23 id. 326.
From these decisions, it follows that the provisions of the Revised Statutes of 1870 retained in force sect. 2905, in reference to the limitation of formalities in pledges of negotiable instruments, notwithstanding the Revised Code of the same year contained the provisions of the old code alongside of the amendment of 1852. One article of the Code requires certain formalities, 3160; the other article, 3158, dispenses with them, and the Revised Code contains the dispensing article. So neither an act before a notary, nor an indorsement by the pledgor, is required to constitute a valid pledge.
2. Informalities in a pledge cannot enable the pledgor to impeach it, Partee, Syndic, v. Corning, 9 La. Ann. 539; Brother v. Saul, 11 id. 225; although they may be required as against third persons, Matthews v. Rutherford, 7 id. 225.
3. The syndic, receiver, or assignee of a debtor has no greater authority than the debtor, except as the statute provides. Partee, Syndic, v. Corning, 9 La. Ann. 539; Gibson v. Warden, 14 Wall. 244; Cook v. Tullis, 18 id. 332; Mitford v. Mitford, 9 Ves. Jr. 86.
Assignees in bankruptcy are subject to the same equities affecting the bankrupt's rights which could have been enforced against him. Grant v. Mills, 2 Ves. & Bea. 308; Ex parte Hanson, 12 Ves. 349; Turner v. Harvey, Jacob, 174; Campbell v. Slidell, 5 La. Ann. 274; Gibson v. Warden, 14 Wall. 244; Yeatman v. Savings Institution, 95 U.S. 764.
4. It is lawful to constitute the pledgor an agent to collect the negotiable instruments pledged, and to replace those collected by others, or to change the securities. Clark, Assignee, v. Iselin, 21 Wall. 360; White v. Platt, 5 Den. (N. Y.) 269.
5. Sect. 52 of the statutes of 1864 measures the power of setting aside transfers, &c., at the instance of a receiver. This case has none of the elements prescribed. The interdiction of that section has the same purpose as that of sect. 35 of the Bankrupt Act, and operates on sales or pledges or transfers for a fraudulent object, not on those with an honest purpose.
Two things must concur to bring the transaction within the inhibitions of the law: the fraudulent design of the bankrupt, and the knowledge of it upon the part of the transferee. Tiffany v. Lucas, 15 Wall. 410; Wager v. Hall, 16 id. 584; Wilson v. City Bank, 17 id. 473; Cook v. Tullis, 18 id. 332; Mays v. Fritton, 20 id. 414.
Advances may be made in good faith to a debtor to carry on his business, no matter what his condition may be, and the party making these advances can lawfully take securities at the time for their repayment. Tiffany v. Boatman's Institution, 18 Wall. 376; Mays v. Fritton, 20 id. 414; Clark v. Iselin, 21 id. 360; Watson v. Taylor, id. 378; Burnhisel v. Firman, 22 id. 170; Sawyer v. Turpin, &c., 91 U.S. 114; Jerome v. McCarter, 94 id. 734.
6. The fact that the senior member of the firm of Cavaroc & Son was president of the bank is immaterial, for he acted as stakeholder in his individual capacity. The contract was between the Credit Mobilier and the bank. In holding the pledge, the Cavarocs, like all stakeholders, were agents of both parties. There was no inconsistency in this position arising from the fact that one of the partners was president of the bank. He did not stand as contracting on both sides. He said to the bank and to the Credit Mobilier, distinct persons from himself, I will hold these stakes. He made the contract not with himself, but with two other parties.
7. The contract was made with the authority of the corporation, through its board of directors; and the institution, having received the benefit of the loan, cannot avoid its liability by denying the authority of those who contracted in its behalf. Ottawa Plank Road v. Murry, 19 Ill. 336; Bissell v. Michigan Southern & Northern Indiana Railroad Co., 22 N. Y. 258; Township of Pine Grove v. Talcott, 19 Wall. 666; Bank of the United States v. Dandridge, 12 Wheat. 64; Bezou v. Pike, 23 La. Ann. 788.
8. The contract was within the ordinary action of banks and bankers, and not in contravention of the policy or the provisions of the banking act.
Mr. J. D. Rouse and Mr. Charles Case, contra.
MR. JUSTICE BRADLEY, after stating the case, delivered the opinion of the court.