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SAFETY MOTORS v. ELK HORN BANK & TRUST CO.

February 16, 1954

SAFETY MOTORS, INC.
v.
ELK HORN BANK & TRUST CO. ET AL.



The opinion of the court was delivered by: John E. Miller, District Judge.

      In order that the issues might be clearly presented, the Court will first state the substance of the pleadings filed in this case.

Complaint

On June 4, 1953, plaintiff filed its complaint against the defendants in which it alleged:

That plaintiff is an Illinois corporation engaged in the business of selling automobiles. Defendant, Elk Horn Bank and Trust Company, hereinafter referred to as "Elk Horn," is an Arkansas state banking corporation; defendant, Citizens National Bank, hereinafter referred to as "Citizens", is a national banking corporation; and both defendants have their principal places of business in Arkadelphia, Arkansas.

"During May, June and July, 1950, plaintiff delivered possession in Chicago, Illinois, of certain automobiles to J.R. Shepherd, d/b/a Shepherd Motor Co., of Arkadelphia, Arkansas, against sight bank drafts payable to the order of plaintiff drawn by Shepherd Motor Co. upon one or the other of defendant banks. * * Title papers to the aforesaid automobiles were attached to the drafts, which were then endorsed by plaintiff and deposited with the Marquette National Bank of Chicago, Illinois. The drafts were forwarded by the latter bank through the Chicago Clearing House and in turn reached The First National Bank of Chicago, which transmitted same to one or the other of defendant banks for acceptance and payment. The letters of transmittal from The First National Bank of Chicago, * * * instructed defendant banks in each instance to wire nonpayment of items $1,000 and over and to protest all items over $500. All of said drafts appeared on their face to be foreign bills of exchange."

Between and including the dates of June 26, 1950, and July 6, 1950, First National forwarded eleven drafts drawn upon Elk Horn to said bank for acceptance and payment; these drafts were in the total sum of $12,040.

"Defendant Elk Horn wilfully failed and refused to wire notice of nonpayment of said drafts and to protest same, as instructed by the corresponding bank. Defendant Elk Horn wilfully and knowingly failed and refused to return said drafts within twenty-four (24) hours after receipt or within any reasonable time, but, to the contrary, wrongfully retained said drafts forwarded to it between June 26 and July 3 until on or about July 8, 1950, and wrongfully retained said drafts forwarded to it on July 6 until on or about July 15, 1950."

Upon information and belief plaintiff alleges that Elk Horn, during the time it held said drafts, had sufficient funds of Shepherd Motor Company on deposit to pay said drafts, but wrongfully failed and refused to pay the same.

"The eight drafts forwarded to defendant Elk Horn between June 26 and July 3 were received back from said bank by the corresponding bank on July 10, 1950. Plaintiff inquired of Shepherd Motor Co. as to the reason said drafts had not been honored and was informed that the bank account of Shepherd Motor Co. had been moved to defendant Citizens National Bank and was instructed to change the name of the drawee bank to defendant Citizens. Accordingly, the aforesaid eight drafts were transmitted by the corresponding bank to defendant Citizens on July 12, 1950, for acceptance and payment. The three drafts forwarded to defendant Elk Horn on July 6 were received back from said bank by the corresponding bank on July 17 and were, in accordance with the instructions aforesaid, transmitted to defendant Citizens on July 19, 1950."

Between and including the dates of July 15, 1950, and July 31, 1950, First National forwarded to Citizens for acceptance and payment 16 additional drafts in the total sum of $16,709.04, said drafts being drawn upon Citizens and payable to the order of plaintiff.

"Defendant Citizens wilfully failed and refused to wire notice of nonpayment of said drafts and to protest same as instructed by the corresponding bank. Defendant Citizens wilfully and knowingly failed and refused to return said drafts within twenty-four (24) hours after receipt or within any reasonable time, but, to the contrary, wrongfully retained all of the aforesaid drafts until on or about August 5, 1950."

Upon information and belief plaintiff alleges that Citizens had sufficient funds on hand, during said time, to pay said drafts, but wrongfully failed and refused to pay the same.

Plaintiff prays judgment against Elk Horn for $12,040.04, together with interest thereon, and against Citizens for a total of $28,749.04, together with interest thereon.

Answer of Citizens National Bank

On July 11, 1953, defendant Citizens National Bank filed its separate answer in which it admitted the receipt of the drafts in question, but denied that said drafts were forwarded for acceptance and alleged that said drafts were in fact forwarded to it for collection and remittance.

Said defendant denied that it wilfully failed and refused to wire nonpayment of said drafts and to protest same, and alleged that on July 21, 1950, it notified First National that the drafts were drawn against uncollected funds, and on July 25, 1950, again notified it that said drafts were still unpaid; admitted that it did not protest said drafts, but denied that plaintiff was damaged thereby; admitted it did not return the drafts within twenty-four hours after receipt but denied that it did so wilfully and alleged that it returned said drafts within a reasonable time; denied that it was authorized by Shepherd Motor Company to pay said drafts.

Said defendant further alleged that said drafts were secured by automobile title papers attached to the drafts, and "by implied instruction of plaintiff said titles were to be examined by Shepherd Motor Company and payment of draft authorized by Shepherd Motor Company upon approval by it of the title papers attached to drafts; and upon payment of the draft by Shepherd Motor Company, the bank was then authorized to surrender the drafts and the title papers to the Shepherd Motor Company. That these instructions were well known to plaintiff herein. That because of these instructions well known to plaintiff herein it was customary to hold such drafts for a longer period of time than ordinary unsecured commercial paper, and plaintiff by its action agreed to such course of conduct on the part of defendant."

Said defendant also alleged:

That Shepherd Motor Company never approved the titles or authorized payment of said drafts, and within a reasonable time Citizens returned the drafts and title papers to plaintiff; that no act of defendant deprived plaintiff of possession or right to possession of the automobiles.

Shepherd never had sufficient funds in its account to pay all the drafts defendant had received for collection, and Shepherd designated the drafts it desired paid from the funds to its credit.

Many of the drafts received by Citizens were materially altered in that the name of the original drawee had been changed or altered. Said drafts were dated several weeks prior to the time they were forwarded to Citizens, had previously been dishonored, were past due and not negotiable, and plaintiff knew said facts and, if entitled to notice of nonpayment and dishonor, by its action waived its right to such notice.

Plaintiff did not negotiate said drafts within a reasonable time, and transmitted said drafts when it knew that previous drafts were still uncollected and unpaid, and thereby waived any right it may have had to notice of non-payment and dishonor.

That any damage sustained by plaintiff was caused by its own negligence. Plaintiff, as a used car dealer, delivered possession of the automobiles to Shepherd at the time of taking the drafts; that said transaction was not a cash sale, but a credit transaction, "since Plaintiff did not deliver title papers to Shepherd Motor Company but attached same to the drafts, Plaintiff knowing at the time that Shepherd Motor Company would have to make financial arrangements to pay said drafts. Said drafts were made out under Plaintiff's supervision and direction and Plaintiff was to all intents and purposes the drawer of the drafts. It was never Plaintiff's intention that the bank accept the drafts, otherwise it would have made the necessary financial arrangements with the bank and have made the title papers to the bank. On the other hand, the title papers were made to Shepherd Motor Company and it was clearly the intention of the parties that the title papers be surrendered to Shepherd only on payment of the drafts.

Even if the transaction was intended as a cash sale, plaintiff knew, because of former dealings with Shepherd and because the first drafts sent Citizens had been previously dishonored, that the drafts would not be paid promptly, and by continuing to accept the drafts and to turn the automobiles over to Shepherd it was selling the cars on credit and intended to look to Shepherd for its pay.

"When the Plaintiff knew that the drafts were not paid, it was its duty at that time to reclaim the cars and protect itself or to have notified Defendant immediately that it was going to look to the bank for payment, but it did not do this — it elected to proceed against Shepherd, and when it found Shepherd was insolvent and had disposed of the cars, and after the lapse of nearly three years, it comes into court and elects to try and hold Defendant liable for the purchase price of the cars when it had deliberately turned the cars over to Shepherd and had enabled him or his employees to dispose of same; Plaintiff is now trying to hold an innocent party liable for a loss caused by its own negligence and is now estopped by its conduct from asserting its claim against Defendant, if it ever had a claim. Defendant specifically pleads laches and equitable estoppel."

Answer of Elk Horn Bank & Trust Company

On July 14, 1953, defendant, Elk Horn Bank & Trust Company, filed its separate answer which contained substantially the same admissions, denials and allegations as were contained in the answer of Citizens. However, in addition to the allegations substantially the same as Citizens' answer, Elk Horn further alleged:

That the drafts sent to Elk Horn were drawn by one Jewel Reynolds and "that this defendant did not know and had no way of knowing at the time these drafts were drawn by Jewel Reynolds whether he was an agent for Shepherd Motor Company and defendant Elk Horn Bank & Trust Company denies that Jewel Reynolds was an agent for Shepherd Motor Company."

That two drafts forwarded to it on June 26, 1950, were dated May 24, 1950, and that more than three years had elapsed from the time of the issuing of these two items before this suit was filed; defendant specifically plead the statute of limitations as to these two items of $1,085 each, or a total of $2,170.

"For several weeks before the 26th day of June, 1950, plaintiff had been sending drafts through Elk Horn Bank & Trust Company and had been notified that Shepherd Motor Company did not have sufficient funds to take up or cash these drafts and the defendant Elk Horn Bank & Trust Company had been instructed by the plaintiff to hold these drafts until Shepherd would have sufficient funds to pay same; defendant Elk Horn Bank & Trust Company states that in some instances, after obtaining authorization from J.R. Shepherd, they were able to remit and forwarded to The First National Bank of Chicago a remittance, covering the draft, and that some of these drafts were held for several days before the Elk Horn Bank & Trust Company was able to remit on same on account of the condition of the account of Shepherd Motor Company and inability to get authorization from J.R. Shepherd to pay same."

That there was nothing on the drafts or letters of transmittal to indicate that they were cash items, and that plaintiff knew it would be absolutely impossible for defendant Elk Horn to treat said drafts as cash items since they would have to be approved by Shepherd before they could be paid.

Both defendants prayed that the complaint of plaintiff be dismissed.

Amendment to Answer of Citizens

On August 8, 1953, Citizens amended its answer and alleged:

"That on or about the 26th day of July, 1950, C.V. Nichols, vice-president and duly authorized agent of Safety Motors Incorporated called the defendant, Citizens National Bank, on the telephone from Chicago, and spoke to Mr. Edgar Diggs, who was at that time cashier of the Citizens National Bank, and asked Diggs whether the Shepherd Motor Company drafts were still unpaid. Whereupon defendant, Citizens National Bank cashier, Diggs, told plaintiff's agent, Nichols that said drafts were still unpaid and further advised Nichols that due to Shepherd's insolvent condition that he seriously doubted whether the bank would be able to collect said drafts. Whereupon plaintiff's agent, Nichols requested defendant's cashier, Diggs, to retain said drafts and to try to collect same. Defendant's cashier, Diggs, then replied that he would do so and requested Nichols to call the First National Bank of Chicago and advise it that he had requested the defendant bank to hold said drafts and try to collect same. Plaintiff's agent, Nichols, then replied that he would do so."

Citizens thereafter retained said drafts and tried to collect same, but being unable to do so it returned said drafts to First National on or about August 5, 1950.

On January 20, 1954, both defendants filed another amendment to their answers and alleged:

"That the plaintiff, Safety Motors, Inc., has elected to proceed against Shepherd Motor Co. for its remedy and recovery on the drafts involved in this law suit as evidenced by its filing claim against the bankrupt estate of Shepherd, which claim, to the best of the knowledge and belief of the defendants, has been allowed.

"That by reason of said election of one of two inconsistent remedies, plaintiff thereby disavowed the theory of acceptance upon which the law suit is based, and is therefore barred from bringing this action."

Upon the issues made by the pleadings the case was tried to the court on January 20, 1954. At the trial plaintiff introduced in evidence the ore tenus testimony of Floyd M. Caraway and C.V. Nichols; the depositions of J. Carl Sommer, Gerrit Ruisard and John Cunnea; certain interrogatories propounded by plaintiff to defendants, and answers thereto; along with exhibits to the testimony of the witnesses. Defendants introduced the ore tenus testimony of A.C. Stone, W.P. Jones, Jr., J.R. Shepherd, Cecil Cupp, Jr., Edgar Diggs, and Lawrence E. Powell; the deposition of Miss Lillie Stevens; certain interrogatories propounded to plaintiff and answers thereto; and exhibits to the testimony of the witnesses.

At the conclusion of the trial the case was submitted and taken under consideration and time was allowed the attorneys for the parties in which to file briefs in support of their respective contentions. The briefs have been received, and now the Court, after considering the pleadings, ore tenus testimony of witnesses, depositions, exhibits, interrogatories and answers thereto, and briefs of the parties, now makes and files herein its findings of fact and conclusions of law, separately stated.

Findings of Fact

1.

Plaintiff, Safety Motors, Inc., is a corporation organized and existing under the laws of the State of Illinois, with its principal office and place of business in Chicago, Illinois, and is a citizen of said state.

Defendant, Elk Horn Bank and Trust Company, hereinafter referred to as Elk Horn, is a state banking corporation organized and existing under the laws of the State of Arkansas. Defendant, Citizens National Bank, hereinafter referred to as Citizens, is a national banking corporation organized and existing under the laws of the United States. Both defendants have their principal offices and places of business in Arkadelphia, Arkansas, and are citizens and residents of the State of Arkansas.

The matter in controversy, exclusive of interest and costs, exceeds the sum of $3,000.

2.

Plaintiff was in the business of selling new and used motor vehicles, and during the months of May, June, and July, 1950, delivered vehicles, mostly pick up trucks, to J.R. Shepherd, doing business as Shepherd Motor Company, Arkadelphia, Arkansas. Shepherd would contact plaintiff by telephone and they would negotiate concerning the purchase by Shepherd of said vehicles from plaintiff. Then Shepherd would send one or more drivers to plaintiff's place of business in Chicago to obtain possession of the vehicles. At the time possession of the vehicles was surrendered to Shepherd's driver, one of plaintiff's employees would fill out a sight draft drawn upon one of the defendant banks and payable to plaintiff. This draft would be signed by Shepherd's driver and he would then be given possession of the vehicle to transport the same to Shepherd's place of business at Arkadelphia, Arkansas. The drafts which were executed by plaintiff and Shepherd's drivers were all drawn in the same manner, and the following is an example of a draft drawn upon Citizens:

 |------------------------------------------------------|
 |  $1,085.00          June 30                    1950 |
 |                      On Sight                 Pay to |
 |   the order of   Safety Motors, Inc.                 |
 |   One Thousand Eighty Five and 00/100        Dollars |
 |                            with exchange             |
 |   For One Ford Pickup Motor #98RC 386061             |
 |   Value received and charge the same to account of   |
 |                                                      |
 |   To Citizens National Bank }    Shepherd Motor Co.  |
 |   No. Arkadelphia, Ark.     } By Walter Gustafson    |
 |------------------------------------------------------|

After a draft was executed and the possession of the vehicle delivered to the driver of Shepherd, plaintiff would secure from the State of Illinois a Certificate of Title for the particular vehicle involved. It took several days, and sometimes longer, to secure said titles, and in the meantime Shepherd had possession of the vehicles although title had not passed and he had no valid certificate of title thereto. When the certificate was received, plaintiff would place said certificate of title, along with an invoice and bill of sale, in an envelope, seal the same, and attach the envelope to the draft covering said vehicle. Then, the draft, with envelope attached, was deposited in the Marquette National Bank of Chicago, Illinois. By handling the drafts in this manner, plaintiff ...


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