The Federal Court, in the case of the United States National Bank v. First National Bank of Little Rock, 79 Fed. Rep. 296, holds that an officer of a bank has the authority to indorse negotiable paper owned by the bank; and that such transactions come within the ordinary transaction of the business of the bank. Such transactions are of hourly occurrence in all banks located in large business centers.

The court says:

"There is an obvious difference between a transaction where a bank goes into the market as a borrower, giving its own notes, bills or other obligations for the money borrowed, and a transaction where it disposes of the notes and bills of third parties which it has previously discounted. In the former case, it becomes primarily bound; it is the principal debtor; while, in the latter case, if it indorses the paper, it only incurs a contingent liability which may never ripen into an absolute obligation to pay. The latter transaction has more, if not all of the characteristics of a sale, and it is generally regarded as a sale whereby assets of a certain kind are converted into cash, *** but we can see no propriety in characterizing the transaction as a borrowing of money, when a person or corporation sells commercial paper made by third parties, which they happen to own."

The court, in further discussing this subject, says:

"We think the weight of reason and authority is in favor of the view that it is within the scope of the implied power of the president of a bank to indorse negotiable paper in the ordinary transaction of the bank's business; and that a special authority to that end need not be conferred by the board of directors. Such implied power is generally conceded to the bank cashier, and we know of no sufficient reason why the implied power of the chief executive officer of a bank should be more limited in this respect than those of its cashier." 1

The rule laid down and announced by the court, in the case of the Western National Bank v. Armstrong, 152 U. S. 346, that the president or cashier of a national bank is devoid of

1 Bank v. Smith, 23 C. C. A. 80, 77 Fed. 129, 135; Fleckner v. Bank, 8 Wheat. 338, 360; Wild v. Bank, 3 Mason, 505, Fed. Cas. No. 17,646; Bank . Perkins, 29 N. Y. 554, 569;

Cooke v. Bank, 52 N. Y. 96; Bank v. Wheeler, 21 Ind. 90; Merchants' Bank v. State Bank, 10 Wall. 604, 650.

power to borrow money or re-discount notes unless duly authorized to do so by the board of directors, it is claimed does not apply where a general usage is shown between correspondent banks.

This rule can be supported on no other theory than that the usage and custom was condoned and acquiesced in by the directors.

It is interesting in this connection, to read the opinion of the court in the case cited, namely the Western National Bank v. Armstrong, and to note the close distinctions made by the court in the application of the rule between re-discounts and borrowing money by a bank.

While the practice of discounting bills receivable is lawful and comes within the scope and authority, impliedly and incidentally given to bank officers, and is a usage which may be recognized between banks in certain localities, and is daily practiced, it may be carried to a dangerous degree and extent. It should be guarded with a degree of conservatism and therefore the wisdom of the law is seen in making of discounts an inalienable function and power of the directors.

CHAPTER XXVIII.

DEALING IN COMMERCIAL PAPER.

§ 237. Distinction between "discount" and "purchasing." It is the principal business of a bank to acquire commercial paper. The law does not require, and it is not held that all its promissory notes should be drawn payable and executed directly to the bank. The greatest portion of the bank's business in some localities, is in the discounting of negotiable notes. The statutes relating to national banks, expressly confer to them, the power "of discounting and negotiating promissory notes."

Discounting notes is not held to be "purchasing." The subject has frequently been before the courts and it is held that there is a distinction between "discounting" and "purchasing outright."

In the case of the First National Bank of Rochester v. Pierson, 24 Minn. 140, the court holds that, where it was shown by the evidence that the bank was the "purchaser purchaser" of the note in question, it was an act clearly in violation of the statute.

The court, in discussing the question, says:

"As a conclusion of law, etc., etc., the plaintiff, a national bank corporation, had no right or authority to purchase or traffic in promissory notes as " choses in actions" and did not in law acquire by the supposed purchase, any title to the notes in question, and cannot recover upon it in this action."

This is a strict construction of the statute as it does not, in expressed words, directly authorize national banks to purchase promissory notes.

It is also held in the Maryland case, Jessie Lazear v. The Union Bank of Maryland, 52 Md. 78, that a national bank is forbidden this power. The court says that there is a plain distinction between the language of the statute between " purchasing" and "discounting" commercial paper; that while the power is specifically recognized and given to a national bank to discount notes, drafts, bills of exchange, etc., the power is

conspicuously withheld authorizing national banks the power to "purchase" promissory notes.

The court here also construes the statute strictly upon the ground that there is no express provisions or power authorized by the law, holding that there is an important distinction between "purchasing" and "discounting" notes.

The question is of sufficient importance to give other authorities. The Supreme Court of the State of Illinois, in the case of the First National Bank of Greenville v. Asa J. Sherburne, 14 Ill. App. 566, has so clearly presented the question with such sound reasoning, holding that a National bank may lawfully purchase a note by the way of discount.

We cite from the opinion of the court:

"The power given to national banks as respects the matters here in issue, is to carry on the business of banking by discounting and negotiating promissory notes, drafts, bills of exchange and other evidences of debt.' R. S. U. S., § 5136. It is urged the transaction involved in this case was a purchase by appellant of the note, that a national bank has no power to make such purchase, and that the bank took no title thereto. and cannot recover thereon. The cases of Lazear v. National Union Bank of Maryland, 52 Md. 78; F. & M. Bank v. Baldwin, 23 Minn. 198, and the First National Bank v. Pierson, 24 Minn. 140, are cited as authorities in that behalf. As we understand the facts of the case bearing upon the question under consideration, the note was executed by appellee and payable on the first of September, 1882, to the order of one, E. B. Wise, and was by said Wise on the 29th of June, 1882, and before maturity, indorsed in blank and delivered for value through its cashier to the appellant bank. No point was made in the court below as to the title of appellant, and the evidence does not disclose what discount was made upon the note.

"The argument made here, is based upon the statement of the cashier, that he purchased the note from Wise and that it was bought in the usual course of business as he bought other notes. It may be questionable whether the words used in the statute by negotiating' are broad enough to include that which was here done by the bank; and yet according to the lexicographers, the word negotiate' means not only to transfer,' 'to sell,' 'to pass' but 'to procure by mutual intercourse and

agreement with another.' It appears the note was taken by a national bank and 'in the usual course of business.'

6

"Admitting the bank had no power to become vested with the legal title to the note otherwise than by discounting' itthe fair and reasonable presumption, from the fact it was taken in the usual course of business of a national bank, would be that it was discounted. The fact the cashier in stating the transaction uses the words 'purchased' and 'bought,' we do not deem of much importance.

"In Atlantic State Bank v. Savery, 82 N. Y. 291, a similar statute was under consideration and the word bought was used by the witness and a written memorandum of the transfer was made and delivered at the time in which the word 'sold' was used, and yet it was held it was a discount and the title to the note was valid. In the present case, the paper was procured from Wise, who was both payee and indorser, and was transferred by an indorsement imposing the ordinary liability upon the indorser.

"Although in form and in common parlance it was a purchase of the note, yet, in substance, it was a loan by way of discount made by the bank to Wise; and the relation of debtor and creditor as between them was created.

"Discount is the difference between the price and amount of the debt, the evidence of which is transferred; and the character of the paper with reference to its being business or accommodation paper is immaterial as respects the transaction being properly denominated a loan.1

"Had the transfer been by delivery only, or by an indorsement without recourse, then, probably it might be regarded as an absolute purchase of the note.

"This is sufficient upon this point for the purposes of the present controversy. We are inclined, however, in the absence of Federal or binding authority as to the construction to be given this subject, 5136 R. S. U. S., to place our decision upon higher ground. A purchase may be made by way of discount equally as well as a loan may be made by way of discount. Discount means ex vi termini, a deduction or drawback made upon advances or loans of money upon negotiable paper or

1 National Bank r. Johnson, 104U. S. 271.