GOODRICH, C.J.: This case presents the often recurring situation of two people who, doing business in the ordinary course, have been fooled by a swindler. The swindler disappears or goes to jail. Which of the two parties is to bear the loss his rascality has occasioned?
The trial court made very full findings of fact on the history of the dealings among the parties and also the facts of the immediate transactions out of which this suit arose. Those extensive findings need not be repeated here. See 112 F. Supp. 761 (E.D. Pa. 1953).
Our set of operative facts gets down to this comparatively simple case. A bank's customer (the bank being the defendant, Fidelity-Philadelphia Trust Company) brings to the bank what purports to be the negotiable promissory note of a whiskey distiller. This note is accompanied by what purports to be a negotiable warehouse receipt evidencing a deposit of whiskey, which is to be collateral security for the note. Both the note and the warehouse receipt are, in fact, spurious. The customer (Philadelphia Acceptance Corporation, hereafter called PAC) does two things. First, it deposits with the bank in its trust department the purported warehouse receipt, for which the bank issues a safekeeping receipt and puts the document in a file. This is a bailment for the benefit of PAC and the purchaser of the promissory note. The charge made by Fidelity for the service is barely sufficient to cover its expenses in connection therewith. Second, the customer, PAC, leaves with the collection department of the bank a draft drawn by itself in its own favor on the plaintiff, The First Trust and Savings Bank of Zanesville, Ohio, (Zanesville), which is to be the purchaser of the note. Forthwith defendant Fidelity credits its customer with the amount of the draft and charges PAC interest until the transaction is closed. It is closed by Fidelity's forwarding the draft, note and safekeeping receipt to Zanesville. This bank in turn sends Fidelity a check payable to Fidelity's order and drawn on the Chase Bank in New York. In due course of time this check clears and Fidelity is thus reimbursed for the credit it has made to its customer.
The first problem is: Does this transaction make Fidelity a seller within the terms of the Securities Act of 1933*fn1? It should be noted that what was done here is very similar to what goes on in thousands and thousands of cases where a bank advances funds to its customer upon having endorsed to it the customer's draft on a third party, accompanied by a negotiable bill of lading or warehouse receipt. The only addition here is the keeping of the purported warehouse receipt in the files of Fidelity, not because Fidelity wanted it, but because of the arrangement made between PAC and Zanesville*fn2 The situation differs also from the sight-draft-bill-of-lading-attached transaction in that here PAC's draft was accompanied by the distilling company's note, which was the supposed thing of value given for the loan.
If this set of facts constitutes Fidelity a seller under the Securities Act, it seems to us inevitable that every bank which advances money to a customer upon a sight draft and negotiable bill of lading is also a seller. True there are one or two additional facts in this case.Fidelity here stored in its safekeeping files the purported warehouse receipt. But we do not see that this fact affects the relation of the parties to the collection transaction. The deposit of the receipt was a convenience to PAC and Zanesville, for it made easier the substitution of new receipts and notes when this was in order.It was frequently in order, for during the years 1939 to 1950, Zanesville had made 220 purchases of distillers' notes from PAC. The plan for such deposit with Fidelity was worked out by PAC and Zanesville, as shown in the recital in footnote 2.
It is also true that Fidelity sent some information to Zanesville at one time about its customer, PAC, at Zanesville's request. We do not see how that adds anything to the concept of Fidelity as a seller. The information was gratuitously given. Fidelity did not urge by intimation or express statement that Zanesville should act upon the information. Whether the letter had other legal consequence we shall discuss later.
The words of the federal Securities Act of 1933 are very, very comprehensive indeed. The subject matter includes documents such as drafts and notes. By express wording "sale" is pretty broadly defined. Here is the language: "The term 'sale', 'sell', 'offer to sell', or 'offer for sale', shall include every contract of sale or disposition of, attempt or offer to dispose of, or solicitation of an offer to buy a security or interest in a security, for value ..." 15 U.S.C.A. § 77b(3).
Furthermore, it can hardly be denied that when a bank takes a document for collection, advancing to its customer credit prior to the actual collection being made, the bank then becomes at least a security owner. Maryland Casualty Co. v. National Bank of Germantown, 320 Pa. 129, 182 Atl. 362 (1936). And see Note, 22 A.L.R. 2d 479 (1952). And when it endorses the instrument, on which it thus advanced credit, to another bank by the general endorsement "pay any bank, banker or trust company," and gets its money, has it not passed its interest in that document along to him who pays the draft and gets the supposedly valuable bill of lading, warehouse receipt or note accompanying the draft? And if that is so, why have we not been pushed into the startling conclusion that every bank that makes an advance on an instrument left with it for collection, and passes that instrument on to someone else, has become a seller under the terms of the federal statute, if the transaction is one in interstate commerce?
We think that we do not need to reach this startling conclusion, at least on the facts of this case. In this we are supported by the clearly established law of Pennsylvania with regard to the relation of a bank and its depositor. It is true that in construing the federal statute we are not, of course, bound by state law concepts. But in deciding whether Fidelity has done things which bring it under the terms of a federal statute, we look to the law of Pennsylvania to see the state law consequence of business dealings between PAC, a Philadelphia customer, and Fidelity, a Philadelphia bank.
In the case of each of the worthless notes involved in this litigation, PAC, as stated above, had drawn a draft in its own favor upon Zanesville. These drafts were endorsed to the order of Fidelity, without qualification. Such endorsement is a special endorsement under section 34 of the N.I.L.*fn3 and is in no sense a restrictive endorsement.Ordinarily when a person is given physical possession of a negotiable instrument thus specially endorsed to him he becomes the owner. But in Pennsylvania this matter is expressly covered by a statute of 1931 and that statute is important enough to quote here:
"Except as otherwise provided by agreement and except as to subsequent holders of a negotiable instrument payable to bearer or indorsed specially or in blank, where an item is deposited or received for collection, the bank of deposit shall be agent of the depositor for its collection and each subsequent collecting bank shall be subagent of the depositor but shall be authorized to follow the instructions of its immediate forwarding bank, and any credit given by any such agent or subagent bank therefor shall be revocable until such time as the proceeds are received in actual money or an unconditional credit given on the books of another bank, which such agent has requested or accepted. Where any such bank allows any revocable credit for an item to be withdrawn, such agency relation shall, nevertheless, continue, except the bank shall have all the rights of an owner thereof against prior and subsequent parties to the extent of the amount withdrawn ..." Pa. Stat. Ann. tit. 7, § 213 (Purdon 1939).
A later section of the same statute provides:
"Where a deposited item is payable to bearer or indorsed by the depositor in blank or by special indorsement, the fact that such item is so payable or indorsed shall not change the relation of agent of the bank of deposit to the depositor, but subsequent holders shall have the right to rely on the presumption that the bank of ...