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SAFETY MOTORS v. ELK HORN BANK & TRUST CO.
February 16, 1954
SAFETY MOTORS, INC.
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
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
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
"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
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
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
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.
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
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
"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
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.
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
| $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
of Chicago, Illinois. By handling the drafts in this manner,