District Court, D. South Dakota. June, 1927.

I. Banks and banking 109(1)-Notes executed by bank officers to correspondent bank held to constitute "bank transaction," author izing correspondent bank to charge account of other bank on maturity.

Notes executed by bank president, in sole management and control and active charge of its affairs, and by other bank officers to correspondent bank for purpose of securing funds for bank held, in view of custom and reconcilements showing that both parties intended notes for use of bank, to constitute a "bank transaction," and not a personal loan, so that correspondent bank was justified in charging the amount of such notes on maturity to account carried with it by bank for whose use notes were executed.

2. Banks and banking 102-Reconcilement with correspondent bank, signed by officers who were also nominal makers of note included in such reconcilement, held binding on bank for which money was borrowed on note.

Reconcilement by cashier and vice president, covering transaction whereby correspondent bank charged notes executed by bank president and vice president, signing reconcilement to bank's account, constituted an act of the bank binding on board of directors, who were in duty bound to examine accounts, since reconcilements were made in ordinary course of business by such vice president, who, although signing notes, was only a nominal maker for use of bank.

3. Banks and banking ←77(4)—Bank receiver held estopped to assert claim against correspondent bank charging notes executed for use of bank by its officers, to bank's account.

Where notes executed by bank officers to correspondent bank were treated by all parties thereto as constituting a bank transaction, and not personal obligation of makers, receiver is estopped to assert claim against correspondent bank because of its action in charging such notes to bank's account, in that receiver stands in no better position than bank, if bringing ac tion itself.

4. Account stated 6(1)-Cash letters and reconcilement statements covering notes executed by bank officers to correspondent bank and charged to bank's account constituted "account stated."

Transaction between bank and correspondent bank, consisting of forwarding of cash letters and exchanging reconcilements covering notes executed by bank officers and charged by correspondent bank to bank's account on maturity, held to constitute an "account stated," in that such letters and reconcilement sheets and statements contained all items included within transactions of all character between banks.

[Ed. Note.-For other definitions, see Words and Phrases, First and Second Series, Account Stated.]

77(4)-Receiver can. not recover against correspondent bank on notes executed by bank officers and charged to bank on maturity, on theory of conspiracy to conceal liabilities.

Receiver for closed bank held not entitled to recover on notes executed by bank officers to correspondent bank and charged to bank's account on maturity, on theory of conspiracy between bank and correspondent to conceal liability of borrowing bank, in that bank while a going concern could not have maintained action therefor, and receiver stands in no better position.

6. Banks and banking

114-Receiver for in

solvent bank cannot recover against correspondent bank payments on personal loan to president of insolvent bank after acceptance and reconcilement.

Where president of bank paid interest on personal loan from correspondent bank by check or draft in certain instance, and in other instances correspondent bank charged account all items were remitted by correspondent bank to bank of which borrower was president, and and accepted and reconciled by proper officer of insolvency held not entitled to recover such paybank other than president, receiver after bank's ment against correspondent bank, particularly since payments were charged to account of borrower, and in each case he had credit to cover charge.

Eureka and the German Bank of Eureka, which the former succeeded, in payment of the personal indebtedness of one Christian Vorlander, president of the said German Bank and thereafter of the First National Bank of Eureka. The first four causes of action are, for practical purposes, alike, and the fifth is for interest paid upon what is conceded to have been a personal obligation of said Vorlander, president of the Eureka Bank, to the defendant bank.

While the facts are undisputed, counsel for the respective parties do not agree with the inferences naturally and legitimately to be drawn from the undisputed facts, and therefore disagree as to the conclusions of law applicable thereto. In my view of the situation presented, in the light of the uniform decisions of the courts, not only in this judicial circuit, but of the different circuits and the United States Supreme Court as well, the rights of the parties are determined largely by a proper interpretation of the real intent and purpose of the parties to the transactions made the basis of plaintiff's causes of action.

Plaintiff urges a recovery upon the theory that Vorlander was indebted to the Eureka Bank by reason of hidden defalcations, and urges that he gave his personal and individual note to, and borrowed money from, the defendant bank which he placed to his credit in the Eureka Bank, and urge further that this credit was applied by operation of law upon the existing indebtedness of Vorlander to the Eureka bank. It is further urged that upon maturity of the notes so given upon the authority of Vorlander the defendant bank charged the amount of the notes, respectively, with interest, against the account of the Eureka bank, there being at the time a credit balance in favor of the Eureka bank on the books of the defendant bank which was a depository of the Eureka bank. Upon this situation it is urged by the plaintiff that the defendant bank thereby took funds of the Eureka bank in payment of Vorlander's personal obligation, knowing the funds to be the property of the Eureka bank.

The defendant urges as a defense to the first four causes of action of the plaintiff:

(1) That the loans were made to the Eureka bank, in the first instance, secured by notes of Vorlander, and in the other transactions by other officers of the bank, and that in each of these transactions the note was given by, and the credit extended to, the Eureka bank and the money credited to its account, and thereafter paid out upon the checks and drafts and for the benefit of the Eureka bank.

(2) That the Eureka bank having obtained and used the proceeds of the loans, respectively, was liable for money had and received.

(3) That the Eureka bank, accepting the charges against its account by its postcards assenting to such charges, and by permitting payments of such obligations to be made by bank funds over a period of years, including a time long prior to the transactions named in plaintiff's complaint, during all of which time the defendant bank was the depository of the Eureka bank, the Eureka bank thereby represented that the transaction was a bank obligation, and further represented thereby that Vorlander had authority to use bank funds in the payment of such obligations; that the defendant bank relied upon these representations to its prejudice; that it made the loans involved upon the strength of these representations and did not pursue its remedies against Vorlander or the other signers of the different notes, and defendant urges that the Eureka bank is therefore estopped from showing that the obligation is not a bank obligation, or that the use of bank funds was not authorized in payment of these obligations.

(4) That by its reconcilement sheets, approval of cash letters, and the entire correspondence between the defendant bank and the Eureka bank whereby the defendant bank sent to the Eureka bank monthly statements of the account of the Eureka bank as it appeared upon its books, obtaining a reconcilement from the Eureka bank, the latter forwarding to the defendant bank in each instance a statement admitting the correctness of the account, except for discrepancies noted thereon, there was an account stated between the banks; that this course of dealing had for its intent and purpose and actually constituted an account stated between the banks, and in the absence of fraud or mutual mistake this account stated cannot be impeached.

(5) Defendant urges that upon the undisputed facts in this case, considering the correspondence which was the basis of each of the transactions in the first four causes of action stated in the complaint, considering the long course of dealing between the defendant, as the depository, and the Eureka bank as the depositor, involving similar loans that had been paid by the Eureka bank, not only to the defendant bank but to other banks to the knowledge of the defendant bank, the directors of the Eureka bank were and are chargeable with notice of this course of dealing, first, because it had continued over such a long period, and, second, because of the

knowledge of other officers, particularly of those officers, including the cashiers, who had the entire charge and management of the business of the Eureka bank, and there was conferred upon Vorlander apparent authority to use bank funds in payment of these obligations.

(6) Defendant urges that, even though the obligations set forth in plaintiff's first four causes of action were personal obligations of Vorlander, and conceding that the defendant bank knowingly received the Eureka bank's funds in payment, notwithstanding all of this, upon the face of this record, as between the defendant bank and Vorlander, it was Vorlander's primary obligation to the Eureka bank, and it was his duty to pay the amount of money so used. Defendant urges that Vorlander did so by applying a part of his credit on the books of the Eureka bank in payment of these obligations.

(7) The defendant further urges that, assuming that the defendant bank took funds belonging to the Eureka bank, knowing them to be bank funds, in the transaction of all of the business between the Eureka bank and the defendant bank, it was the practice, and in each instance, as a matter of fact, the defendant bank did charge against the account of the Eureka bank, in the transaction of their business and in the regular course of their dealing, certain items, including items within the causes of action set forth in the complaint, which charges on the books of the defendant bank were only tentative, and a cash letter was in every instance at once mailed by the defendant bank to the Eureka bank notifying it of the charge, and which said charge on the books of the defendant bank was made subject to the approval and consent and ratification of the Eureka bank, and only became a permanent charge against the said Eureka bank when acknowledgment was received from the Eureka bank, whereupon all items not objected to were permanent charges; that in each instance where an item was charged to the account of the Eureka bank by the defendant bank, and there was objection to it, or it had not been collected, upon receipt of notice thereof, the same was credited back by the defendant bank to the Eureka bank; that, as a matter of fact, therefore, considering the method and manner of dealing, in each and every instance where charges were made to the account of the Eureka bank by the defendant bank, it was only a conditional charge and in effect the claim involved in such charge was in fact, by the cash letter, sent as an item to the Eureka bank for collection, and thereupon

the Eureka bank, by acknowledging the charge as a proper one, represented to the defendant bank that the items had been collected by it, and that the charge should be made permanent.

Upon a review of the record in the case, in the light of the claims and arguments presented by counsel for plaintiff, together with those of counsel for defendant, I am impressed that there is little room for controversy, other than an interpretation of the letters constituting the four separate transactions set forth in plaintiff's complaint, viewed in the light of the intent and purposes of the defendant bank and the officers of the Eureka bank as affected by existing conditions and relations that then and for a long time had existed between them, the knowledge or lack of knowledge of the defendant bank of the course of dealing of Vorlander, president of the Eureka bank, with that bank.

Counsel for plaintiff starts out with the proposition that of course these were personal obligations of Vorlander, for himself, understood by the defendant bank to be his own loans and to be used for his own purposes. Counsel urge that this was the understanding of the defendant bank, and that with this knowledge they loaned him the money for his own purposes and permitted him to take the funds of the bank to pay his own obligations. This is denied by counsel for defendant bank, and they refer to the record, and urge that the entire transaction was in writing, and there is, therefore, no room for dispute. This I find to be the fact.

Taking the first cause of action, the record discloses that it originated with a letter to the defendant bank, dated June 25, 1917, signed by C. Vorlander, president, as follows:

"We need your assistance for about 30 days, and I am enclosing a note for $10,000, signed by myself and Mr. Pufahl. Kindly credit our account with the same. Wool is accumulating here, and besides the county treasurers have remitted to the state treasurer, and we have seen some heavy drains for the last 10 days. We will have plenty of funds about the middle of July, as we are holding certificates of deposit against some national banks in the state and state banks in North Dakota, but they do not mature before July 15th, or about that time. The reason we signed this note personally is because we do not want to show the loan on our books as 'Bills Payable,' and we will soon have to make another statement."

On the next day Pufahl, cashier, wrote the defendant bank a letter inclosing two

notes in the sum of $5,000 each, executed by Pufahl and indorsed by Vorlander, and these notes were received by the defendant bank on June 17, 1917, and thereupon defendant bank returned the $10,000 note referred to in Vorlander's letter above set forth. On the same date the defendant bank entered a credit on its books in favor of the Eureka bank for $10,000, the proceeds of these two notes, debited its account called "Loans and Discounts" in the same sum. The record discloses that on June 25, 1917, the Eureka bank, by Pufahl, entered on its books a debit or charge against the defendant bank, including the $10,000 represented by the two notes in question, and also on its books credited Vorlander with $10,000. These two notes for $5,000 each matured July 26, 1917. On July 25, 1917, the defendant bank wrote to "C. Vorlander, President, the German Bank, Eureka, S. D.," stating that the defendant bank would charge "your account" with $10,050 on July 26th, and inclosing the two $5,000 notes. On July 26, 1917, the defendant bank debited or charged the Eureka bank on its books with the sum of $10,050, and credited "Loans and Discounts" with a sum including these two $5,000 notes, and its account "Interest" with a sum including the item of $50 interest on the two notes. On July 31st, Pufahl credited the defendant bank on the books of the Eureka bank in the sum of $10,466.56, which was in payment of the two notes in question, with interest in the sum of $50, together with other items, and debited Christian Vorlander's personal account with $20,000, including the $10,000 in question, and further debited an account called "Interest" with an item including the $50 interest paid on these two notes for $5,000 each.

The record without dispute thus discloses that the Eureka bank received and used for its legitimate corporate purposes the credits and funds provided by the defendant bank in discounting the two $5,000 notes in question. This credit was drawn upon and checked out by the Eureka bank from the defendant bank for its own purposes and in the usual, ordinary routine of business, and used in the payment of its obligations. The record further discloses that a postcard signed by the Eureka bank was mailed and received by the defendant bank acknowledging the charge of the two $5,000 notes and interest made by the defendant bank, the same constituting a reconcilement by the Eureka bank, acknowledging the correctness of the credit of the proceeds of the notes and the charge of the principal and interest at maturity after receipt by the Eureka bank of the cash letter

from the defendant bank notifying it of such tentative charge.

The second cause of action began with a letter of the defendant bank, dated August 11, 1917, signed by C. Vorlander, president, as follows: "Again I have to call on you for assistance for 30 days. I didn't think I would have to do this, but we have an awful demand for money here. Our county is spending about $100,000 for road work and all banks in the county have been relieved of county funds. Will have plenty

of funds soon and you can rest assured our balance with you will soon look like good old times. Kindly credit our account with the inclosed note."

The

The defendant bank replied to the foregoing letter under date of August 13, 1917, and stated that the defendant bank was crediting "your account" with the proceeds of the note signed by Vorlander and Pufahl and inclosed in the letter of August 11th. Thereafter on September 19, 1917, the defendant bank addressed to "C. Vorlander, President," a letter notifying the Eureka bank of the charge of $10,058.33 against "your account," being the amount of the Vorlander and Pufahl note, with interest. This letter also refers to a letter from the Eureka bank of September 13th, requesting this charge to be made, and which letter does not appear in the record. On August 13, 1917, the defendant bank credited the Eureka bank with $10,000 and debited "Loans and Discounts" in the same amount. On September 19th it credited "Loans and Discounts" $10,000 and "Interest" $58.33, and on September 20th debited the Eureka bank $10,058.33. Eureka bank on August 11th debited the defendant bank $10,000 and credited Vorlander with a like amount. On October 31st it credited the defendant bank with $10,058.33, debited "Loans and Discounts" with $10,000 and "Interest" with $58.33. At the end of the month the defendant bank sent to the Eureka bank a statement of its account, showing this credit of $10,000 under date of August 13th, followed by the word "note," and M. J. Pufahl, cashier of the Eureka bank, executed and returned to the defendant bank a reconcilement, recognizing and affirming the credit. At the end of the month of September, the defendant bank forwarded to the Eureka bank a statement of its account for the month of September, showing a charge on September 20th, $10,058.33, followed by the word "note." Pufahl, cashier, thereupon executed and forwarded the defendant bank a reconcilement of this statement, recognizing and affirming the charge.