debts creditors are entitled to priority over
stockholders against all the property of an
insolvent corporation. But it does not follow
that in every reorganization the securities of-
fered to general creditors must be superior in
rank or grade to any which stockholders may
obtain. It is not impossible to accord to the
creditor his superior rights in other ways.
Generally, additional funds will be essential
to the success of the undertaking, and it may
be impossible to obtain them, unless stock-
holders are permitted to contribute and retain
an interest sufficiently valuable to move them.
In such or similar cases the chancellor may
exercise an informed discretion concerning
the practical adjustment of the several rights.
[6] Question II is answered in the affirma-
tive, with the qualifications which follow.
The primary right of unsecured creditors to

456

the assets of an insolvent corporation *remaining after lienholders are satisfied, must be adequately protected, and to each one of them there must be given such opportunity as the circumstances permit to secure the full enjoyment of this preference.

[7] Question III is also answered in the affirmative, subject to the following qualification. No offer is fair which does not recognize the prior rights of creditors, as above pointed out; but circumstances may justify an offer of different amounts of the same

grade of securities to both creditors and

stockholders. Whenever assessments are demanded, they must be adjusted with the purpose of according to the creditor his full right of priority against the corporate assets, so far as possible in the existing circumstances.

(271 U. S. 426)

OLD COLONY TRUST CO. v. CITY OF
SEATTLE et al.

(Submitted on Motion to Dismiss Dec. 7, 1925, and on Supplemental Motion to Dismiss May 10, 1926. Decided June 1, 1926.)

No. 194.

1. Appeal and error -866(1)-Payment of tax before dismissal of suit by trustee in mortgage to prevent sale of mortgaged property for payment of tax on other property of mortgagor, sold to city with agreement for division of taxes, pertains to merits, and cannot be considered on appeal from decree dismissing suit for want of jurisdiction.

On appeal from decree dismissing, for want of jurisdiction, a suit by the trustee in a mortgage to prevent sale of the mortgaged property for taxes levied on other property of mortgagor, which had been sold to the municipality on agreement for division of taxes, the fact that payment of tax had been made before decree of dismissal pertained to merits, and cannot be considered on jurisdictional appeal.

2. Appeal and error -790 (3)-After appeal
from decree dismissing, for want of jurisdic-
tion, suit by trustee in mortgage to prevent
sale of property for taxes on other property of
mortgagor, sold to city with agreement for
division of taxes, decree in another suit be-
tween mortgagor and defendants, determining
question of such taxes, affords no ground for
dismissing appeal.

for want of jurisdiction, a suit by trustee in
Where, after appeal from decree dismissing,
mortgage to prevent sale of property for taxes
on other property of mortgagor, sold to city
with agreement for division of tax, a decree was
rendered in another suit between mortgagor and
some of defendants, determining question relat-
ing to such taxes, affords no ground for dis-
missing appeal.

3. Courts 303 (2)-Suit by trustee in mort-
gage to prevent sale of property for taxes on
other property of mortgagor, sold to city with
agreement for division of tax, was not suit
against state, prohibiting jurisidiction of fed-
eral court (Const. Amend. 11).

of property for taxes levied on other property
Suit by trustee in mortgage to prevent sale
of mortgagor, which had been sold to city with
agreement for division of taxes, was not a suit
against the state, precluding jurisdiction of
federal court under Const. Amend. 11; it being
only a suit against state agents to restrain them
from wrongful acts threatened under color of
their agency.

ed States for the Western District of Wash-
Appeal from the District Court of the Unit-

ington.

Suit by the Old Colony Trust Company against the City of Seattle and others. Decree dismissing the bills, and plaintiff ap peals. Reversed.

Mr. James B. Howe, of Seattle, Wash., for appellant.

Messrs. John F. Miller, Howard A. Hanson, and Thomas J. L. Kennedy, all of Seattle, Wash., for appellees.

*427

*Mr. Justice VAN DEVANTER delivered the opinion of the Court.

In the beginning of the year 1919 the Puget Sound Power & Light Company owned and was operating two public utilities in the city of Seattle-one a power and lighting system and the other a street railway system. It still owns and operates the power and lighting system, and the Old Colony Trust Company is the trustee in a mortgage which was given thereon in 1921 to secure a large issue of bonds still outstanding.

The city of Seattle now owns and operates the street railway system. The transfer from the Puget Sound Company to the city was effected March 31, 1919, under a contract between them entered into six weeks before. Anticipating that the system would be taxed for that year by reason of the company's ownership in the early months, they stipulat

For other cases see same topic and KEY-NUMBER in all Key-Numbered Digests and Indexes

125

(46 S. Ct.)

ed in the contract, and again in the deed of further, that the plaintiff, if coerced by the
transfer, that "state, county, and municipal threatened sale into paying the taxes, be ac-
taxes" laid on the property for 1919 should be corded the benefit of the lien on the street
borne and paid by them in proportions con- railway property.
forming to their respective periods of posses-
sion during the year. On that basis the com-
pany became obligated to pay one-fourth and
the city three-fourths.

1919.

Shortly after the transfer, state, county, and municipal taxes aggregating over $400,000 were laid on the property for the year Of that amount over $179,000 represented taxes imposed by the city. The taxes became a lien on the property March 15, 1919, and were listed against the company in the tax records by reason of its ownership on that date. The county treasurer was to collect the taxes and pay the money over to the state, county, and city in definite proportions. If it became necessary to collect through distraint and sale, that was to be done through

the sheriff.

When the taxes became due, the city re-
fused to pay any part of them, and the county
*428

treasurer refused to receive *from the com-
pany the part allotted to it by the contract
and deed of transfer, and also refused to re-
ceive from it the whole of the state and coun-
ty taxes, unless it also paid the city taxes.
Then, because the company would not accede
to paying all, the treasurer caused the sheriff
to take steps to collect the whole out of the
power and lighting system by distraint and
sale.

$429

*The defendants appeared and moved that the two bills-original and supplemental-be dismissed for want of jurisdiction of the subject-matter and want of equity, both said to be apparent on the face of the bills. After a hearing on the prayer for an interlocutory injunction and the motion to dismiss, the prayer for the injunction was refused, and three weeks later a decree was entered, dismissing the bills for want of jurisdiction. The court allowed a direct appeal to this court, and also certified that the sole ground of the dismissal was that the suit was, in effect, a suit against the state, and therefore not cognizable in a federal District Court. The statute in force when the appeal was taken limits the consideration here to the jurisdictional question shown in the certificate.

[1, 2] The defendants ask that the appeal be dismissed on two grounds, in support of which they make a showing by affidavits. One ground is that the taxes have been paid, and that this has put an end to the effort to collect them from the mortgaged property. The showing is that the taxes were paid by the mortgagor almost three weeks prior to the decree of dismissal. The plaintiff makes a counter showing that the payment was made by it and the mortgagor acting together; that they were coerced into this by an impending sale, which the court refused to restrain; and that they at the time, not only

were arbitrary and an abusive use of legal process, but reserved all their legal and equitable rights. Obviously the fact of payment and its legal effect pertain to the merits, and cannot be considered on this jurisdictional appeal. The other ground is that, since the appeal was taken, a decree has been rendered in another suit between the mortgagor and some or all of the defendants, which determined the questions relating to these taxes. That decree may have a bearing on the mer-. its, but affords no ground for dismissing this appeal. Illinois Central R. R. Co. v. Adams,

*430

The present suit was brought in the federal District Court by the Old Colony Trust Company, the mortgagee of the power and light-protested that the distraint and intended sale ing system, to prevent the theatened distraint and sale of that property to pay the taxes so laid on the street railway property. The bill grounded the jurisdiction on diverse citizenship; the plaintiff being a Massachusetts corporation and the defendants being public corporations and individual citizens of the state of Washington. The original bill was brought when the sheriff was about to distrain the property. Besides setting forth the matters we have stated, it charged that the defendants were acting in concert and collusion to collect out of the mortgaged power and lighting property the taxes which had been laid on the street railway property and made a special lien thereon, and thus to relieve the city from the performance of its obligation under the contract and deed. The principal prayer was that the defendants be enjoined from resorting to the mortgaged property until after appropriate steps were taken to collect the taxes out of the property on which they were laid and were a lien. There was also a prayer for an interlocutory The bills did not name the state as a deinjunction. After the bill was filed, the sher- fendant; nor did they complain of any act or iff distrained the mortgaged property, as be- omission by it, or seek any relief against it. fore threatened, and gave public notice of in- They did show that some of the taxes were tended sale. This was set up by the court's state taxes and when collected were to be leave in a supplemental bill, which repeated | paid over to the state. But they were not dithe prayers of the original bill, and prayed, rected against the collection of the taxes. On

*180 U. S. 28, 31, 21 S. Ct. 251, 45 L. Ed. 410; Male v. Atchison, Topeka & Santa Fé Ry. Co., 240 U. S. 97, 99, 36 S. Ct. 351, 60 L. Ed. 544.

We come, then, to the question whether the suit was in effect a suit against the state. If it was, the court below was forbidden by the Eleventh Amendment to the Constitution to take jurisdiction of it; otherwise, the jurisdiction was plain.

The test to be applied is illustrated in Hopkins v. Clemson College, 221 U. S. 636, 31 S. Ct. 654, 55 L. Ed. 890, 35 L. R. A. (N. S.) 243. There a state agent, when sued on account of a wrongful act done under color of the agency, advanced the contention that the state was a CITY OF DOUGLAS V. FEDERAL necessary party, and that its immunity from suit extended to the agent. But this court, on a full review of prior decisions, rejected the contention and said (page 642 [31 S. Ct. 656]):

Mr. Justice HOLMES did not participate in the consideration or decision of this case.

"But immunity from suit is a high attribute of sovereignty-a prerogative of the state itself. -which cannot be availed of by public agents when sued for their own torts. The Eleventh Amendment was not intended to afford them freedom from liability in any case where, under color of their office, they have injured one of the state's citizens. To grant them such immunity would be to create a privileged class, free from liability from wrongs inflicted or injuries threatened. Public agents must be liable to the law, unless they are to be put above the law."

In Poindexter v. Greenhow, 114 U. S. 270, 285 et seq., 5 S. Ct. 903, 962, 29 L. Ed. 185, the question presented was whether a suit against a tax collector to recover specific Check indorsed in blank without restriction, property which he had distrained for a state deposited and immediately credited to depositax and was proceeding to sell was in sub-tor's account, "subject to final payment," held

For other cases see same topic and KEY-NUMBER in all Key-Numbered Digests and Indexes

(46 S. Ct.)

paid, and drawer and indorsers discharged, when check, and charged back the amount of it to
correspondent bank accepted of drawee bank the account of plaintiff.
check on a third bank in payment.

Plaintiff brought suit in the District Court

3. Banks and banking 175(1⁄2)-Depositor for Western Texas to recover the amount of
of check indorsed in blank, who received im- the check, on the ground that defendant was
mediate credit, "subject to final payment," negligent in accepting the check of the Will-
held to have no relationship with correspond- cox Bank in payment, instead of cash espe-
ent bank making collection, entitling him to cially because it was chargeable with notice
sue it for negligence In accepting another
check, later dishonored.

*491

that both the Willcox Bank and the Phoenix Bank were then insolvent. The case was Where bank accepted for deposit a check indorsed in blank, immediately credited de- tried without a jury, and resulted in a judgpositor's account, "subject to final payment," ment for defendant (300 F. 573), which was and after dishonor of check accepted in payment affirmed by the Court of Appeals for the Fifth by its correspondent charged back amount of Circuit (2 F.[2d] 818). The case comes here such check against depositor's account, held, bank accepting check became owner thereof, on writ of error. See Judicial *Code, § 241; with whatever rights accrued to it by reason of Id. § 128 (Comp. St. §§ 1218, 1120); Id. § 24, the condition of its credit, and no relationship First (a) being section 991, Comp. St.; Sowell existed between depositor and correspondent v. Federal Reserve Bank, 268 U. S. 449, 45 S. bank entitling him to sue it for negligence, if Ct. 528, 69 L. Ed. 1041. Plaintiff assigns as any, in accepting the subsequently dishonored error the holding of the Circuit Court of Apcheck in payment. peals that defendant was not in such a relationship with plaintiff as to permit plaintiff to recover for the defendant's negligence.

In Error to the United States Circuit Court of Appeals for the Fifth Circuit.

Action by the City of Douglas against the Federal Reserve Bank of Dallas. Judgment for defendant (300 F. 573) was affirmed by Circuit Court of Appeals (2 F.[2d] 818), and plaintiff brings error. Affirmed.

Both plaintiff and defendant concede that it is the rule of the federal courts that a bank which receives commercial paper for collection is not only bound to use due care itself, but is responsible to its customer for a failure to collect, resulting from the negligence or insolvency of any bank to which it transmits the check for collection. This is the socalled "New York rule," which in effect makes the first bank a guarantor of the solvency and diligence of the correspondents which it employs to effect the collection. Exchange Nat. Bank v. Third Nat. Bank, 112 U. S. 276, *Mr. Justice STONE delivered the opinion 5 S. Ct. 141, 28 L. Ed. 722. And see Federal of the Court.

Messrs. Harry E. Pickett and C. T. Knapp, both of Douglas, Ariz., for plaintiff in error. Mr. E. B. Stroud, Jr., of Dallas, Tex., for defendant in error.

490

Reserve Bank v. Malloy, 264 U. S. 160, 164, The county of Cochise, Arizona, on Decem-44 S. Ct. 296, 68 L. Ed. 617, 31 A. L. R. 1261, ber 22, 1920, drew its check on the Central for a comparison of this rule of liability with Bank of Willcox, Ariz., in favor of plaintiff the "Massachusetts rule," by which the initial in error, hereafter called plaintiff. Plaintiff bank is liable only for its failure to exercise delivered the check indorsed in blank to the due care in the selection of an agent to make First National Bank of Douglas, Ariz., and the collection. Under the Massachusetts rule that bank credited plaintiff's account and the agent selected becomes the agent of the passbook with the amount of the check. The owner of the paper, who may maintain an passbook had printed upon its face, "All out action directly against it for the negligent of town items credited subject to final pay-performance of its undertaking. See FederThe Douglas Bank indorsed the al Reserve Bank v. Malloy, supra, 164 (44 S. check, "Pay to the order of the El Paso Ct. 296). Compare Bank of Washington v. Branch, Federal Reserve Bank of Dallas," Triplett, 1 Pet. 25, 7 L. Ed. 37, where the unwhich will be referred to as defendant, and dertaking of the initial bank was to trans

ment."

forwarded it to that bank for collection.

mit paper for collection.

Defendant forwarded the check, in due From this the defendant argues that, under time, to the drawee bank at Willcox. The the rule applied in the federal courts, the latter debited the drawer's account with the First National Bank of Douglas became liable amount of the check, stamped it "Paid," lat- by its contract with plaintiff for the neglier returning it to the drawer, and transmitted to the defendant, in lieu of cash, its own check upon the Central Bank of Phoenix, in an amount covering this and other items. The last check was dishonored; both the Willcox Bank and the Central Bank of Phoenix having failed, the First National Bank of Douglas received no proceeds of the 164 (44 S. Ct. 296). *This was the view taken

gence of the defendant; hence that there was no privity of contract between plaintiff and defendant, and no basis for a recovery, even though defendant was negligent in accepting an exchange check from the Willcox Bank. See Federal Reserve Bank v. Malloy, supra,

#492

For other cases see same topic and KEY-NUMBER in all Key-Numbered Digests and Indexes

by the Circuit Court of Appeals, but the plain- | 617, 31 A. L. R. 1261; Nineteenth Ward Bank. tiff objects that it is not a necessary corollary v. Weymouth Bank, 184 Mass. 49, 67 N. E. of the New York rule, applied in Exchange 670; Winchester Milling Co. v. Bank of WinNational Bank v. Third Nat. Bank, supra, chester, 120 Tenn. 225, 111 S. W. 248, 18 L. R. that one who deposits paper for collection A. (N. S.) 441. Without these words, the remay not proceed against a correspondent, se-lationship between the plaintiff and the bank lected by the initial bank for that purpose, was that of indorser and indorsee; and their for negligent failure to make the collection, use here did not vary the legal rights and liaand that neither Exchange Nat. Bank v. bilities incident to that relationship, unless Third Nat. Bank nor Federal Reserve Bank it dispensed with notice of dishonor to the dev. Malloy so held. It objects, also, that in positor. As was said by the court in Burton any event the rule is not applicable here, be- v. United States, supra, 297 (25 S. Ct. 246): cause of the stipulation appearing on the face of the passbook: "All out of town items credited subject to final payment."

It is said that the effect of this language was to relieve the initial bank, the First National Bank of Douglas, from the liability which would otherwise have resulted under the New York rule, and to make it a mere agent to transmit the paper to defendant for collection, and thus to make applicable the Massachusetts rule. See Federal Reserve Bank v. Malloy, supra. In that case, a local statute relieved the bank receiving paper for collection from any liability, except that of due care in selecting a subagent for collection and in transmitting the paper to it, and it was held that the owner of the paper might proceed against the subagent for negligent failure to collect the paper.

[1-3] It is not necessary to decide any of these questions here, for when paper is indorsed without restriction by a depositor, and is at once passed to his credit by the bank to which he delivers it, he becomes the creditor of the bank; the bank becomes owner of the paper, and in making the collection is not the agent for the depositor. Burton v. United States, 196 U. S. 283, 25 S. Ct. 243, 49 L. Ed. 482; Union Electric Steel Co. v. Imperial Bank (C. C. A.) 286 F. 857; General Amer. Tank Car Corp. v. Goree (C. C. A.) 296 F. 32, 36; In re Ruskay (C. C. A.) 5 F.(2d) 143; Scott, Cases on Trusts, p. 64, note, par. 8, pp.

66-67.

*493

*Such was the relation here between the plaintiff and the Douglas Bank, unless it was altered by the words printed on the passbook to the effect that out of town items were credited "subject to final payment." The meaning of this language, as the cashier of the Douglas Bank testified, and as the court below held, was that, if the check was not paid on presentation, it was to be charged back to plaintiff's account. The check was paid, and the drawer and indorsers discharged. Malloy v. Federal Reserve Bank (D. C.) 281 F. 997; Federal Reserve Bank v. Malloy, 264 U. S. 160, 166, 44 S. Ct. 296, 68 L. Ed. |

There

the bank, when a check was not paid, of charg-
"The testimony * * as to the custom of
ing it up against the depositor's account, did
not in the least vary the legal effect of the
transaction; it was simply a method pursued
by the bank of exacting payment from the in-
dorser of the check, and nothing more.
was nothing whatever in the evidence showing
any agreement or understanding as to the ef-
fect of the transaction between the parties-
the defendant and the bank-making it other
than such as the law would imply from the facts
already stated."

*494

While there is not entire uniformity of opinion, the weight of authority supports the view that upon the deposit of paper unrestrictedly indorsed, and credit of the amount to the depositor's account, the bank becomes the owner of the paper, notwithstanding a custom or agreement to charge the paper back to the depositor in the event of dishonor. Burton v. United States, supra; *Brusegaard V. Ueland, 72 Minn. 283, 75 N. W. 228; Nat. Bank of Commerce v. Bossemeyer, 101 Neb. 96, 102, 162 N. W. 503, L. R. A. 1917E, 374; Walker & Brock v. Ranlett Co., 89 Vt. 71, 93 A. 1054; Aebi v. Bank of Evansville, 124 Wis. 73, 102 N. W. 329, 68 L. R. A. 964, 109 Am. St. Rep. 925. See Scott v. McIntyre Co., 93 Kan. 508, 144 P. 1002, L. R. A. 1915D, 139; Vickers v. Machinery Warehouse & Sales Co., 111 Wash. 576, 191 P. 869. But see Implement Co. v. Bank, 128 Tenn. 320, 160 S. W. 848; Packing Co. v. Davis, 118 N. C. 548, 24 S. E. 365.

Plaintiff having thus surrendered its rights in the paper, only rights arising out of its contract with the initial bank remained. If those rights were affected by the act or omission of defendant, they were affected only because that contract so stipulated. Defendant's duties arose out of its contract with the initial bank, or out of its relation to that bank as owner of the paper. Hence there was no relationship between plaintiff and defendant which could be made the basis of recovery for defendant's want of diligence. Judgment affirmed.