KF QtnrnpU Slam ^rlynnl Sjibratg Cornell University Library KF 1024.S46 The law of bank collections, 3 1924 018 849 756 The original of tiiis book is in tine Cornell University Library. There are no known copyright restrictions in the United States on the use of the text. http://www.archive.org/details/cu31924018849756 THE LAW OF BANK COLLECTIONS BY ARTHUR W. SEL0VER, B. A., LL. M., Author of Treatise on the Negotiable Instruments Laws, etc. ST. PAUL, MINN. KEEFE-DAVIDSON LAW BOOK CO. 1901. "6 7^7^7 COPYKIGHT, 1901. BY AKTHUE W. SELOVER. "Webb Poblishing Co. Press, St. Paui.. 1952 PREFACE. It has been the aim of the author to make this work an accurate and exhaustive treatise on the law of bank collections, and with that end in view, he has endeavored to consult and incorporate all the decisions on this im- portant branch of banking law. It is believed that the importance of the subject justifies the labor required to follow out such a mode of treatment, and it is hoped that the result is a book which shall be of practical service to both lawyer and banker. The treatment which the subject of bank collections has received heretofore in general works on banks an parent title to the bank. In most jurisdictions, the indorse- ment may be explained by parol, to show the true relation of the parties. If the bank discounts the paper, it does not act as a. collect- ing medium, but takes title to the paper. The collecting bank, as bailee, has a special property in- terest in the paper, which entitles it to possession as against all persons but the true owner. This right protects the paper, while in possession of the b*ank as bailee, against garnishment or attachment proceedings by creditors of the owner. The collecting bank has also a lien on the paper in certain cases ; and a right to set off the paper against an indebted- ness of the depositor on general account. § 11, As a general rule, title remains in depositor. In pursuance of the general bailment theory of the nature of the contract for collection, it is practically a universal rule tliat title to paper deposited with a bank for collection in the ordinary course of business does not pass to the bank.*" In other words, a mere deposit for collection does not make the bank a purchaser of the paper."' 1 This position is also in harmony with the general 00 Oppenheim v. West Side Bank, 22 Misc. Rep. 722, 50 N. Y. Supp. 148; Yerkes v. National Bank of Port Jervis, 69 N. Y. 382, 386; First Nat. Bank of Ft. Worth v. Payne (Ky.) 42 S. W. 736. See, also, cases cited in remaining notes to this section. 61 Bailie v. Augusta Sav. Bank, 95 Ga. 277, 21 S. B. 717 ; Wilson y. Tolson, 79 Ga. 137; Merchants' Nat. Bank v. McNulty, 36 Iowa, 229. (19) § 11 BANK COLLECTIONS. [Ch. 1 rule applicable to negotiable instruments, viz., that a transfer for collection without indorsement does not pass title.''^ From a careful study of all the cases, we find one acknowledged test in determining the question of title independently of the form of the indorsement. The only difference in the cases arises from slight variations in the application of this test to particular circum- stances. This test may be stated in the form of a gen- eral rule that title does not pass to the bank unless it has become, by the nature of the transaction, absolutely responsible to the depositor for the amount of the de- posit.''^ Consequently the question whether title passes in a particular transaction is usually and almost neces- sarily one of fact.^* If the bank is authorized to collect the note and apply the proceeds on a debt of the owner to the bank, the bank is merely an agent of such owner, and title does not pass, unless the bank received the note as collat- eral. '^'^ 62 Carter v. Lehman, 90 Ala. 126, 7 So. 735; Fuller v. Bennett, 55 Mich. 357, 21 N. W. 433. Contra, see French v. Jarvis, 29 Conn. 347. 63 Dickerson v. Wason, 47 N. Y. 439, 7 Am. Rep. 455, reversing 54 Barb. (N. Y.) 230; Scott v. Ocean Bank, 23 N. Y. 289; National Butchers' & Drovers' Bank v. Hubbell, 117 N. Y. 384, 15 Am. St. Rep. 515; Armour Packing Co. v. Davis, 118 N. C. 548, 24 S. E. 365; In re State Bank, 56 Minn. 119, 45 Am. St. Rep. 454. 6* United States Nat. Bank of Omaha v. Gear, 53 Neh. 67, 73 N. W. 266; Metropolitan Nat. Bank v. Loyd, 25 Hun, 101, 90 N. Y. 530; National Park Bank v. Seaboard Bank, 114 N. Y. 28, 34, 20 N. E. 632, 11 Am. St. Rep. 612 ; Titus v. Mechanics' Nat. Bank, 35 N. J. Law, 589; In re State Bank, 56 Minn. 119, 57 N. W. 336; Fifth Nat. Bank v. Armstrong, 40 Fed. 46; St. Louis & San Francisco Ry. Co. V. Johnston, 133 U. S. 566, 10 Sup. Ct. 390, 27 Fed. 243. 05 Prescott v. Leonard. 32 Kan. 142, 4 Pac. 172. (20) Ch. 1] RELATION AND ITS INCIDENTS. § 13 The owner of municipal bonds, who leaves them as a special deposit with a bank, which was also the agent of the municipality for payment of the interest and principal on the bonds, does not lose or impair his title thereto by allowing the bank to collect and pay over to him the proceeds of the interest coupons ; and hence can recover against the municipality in case the bank failed after using, for other purposes, the money de- posited with it by the city for payment of the prin- cipal.^® § 12. Title does not pass to bank insolvent when paper was received. Title does not pass where the bank at the time of receiving the paper is hopelessly insolvent, within the knowledge of the officers."'^ This, of course, is on the ground that the contract for collection was fraudulent in its inception. § 13. Title to paper received and treated as cash passes to the bank. If the paper is deposited and treated as cash, the case comes within our general rule that title passes if the bank makes itself absolutely liable to the depositor for the amount of the deposit.''* Wum> § 59 BANK COLLECTIONS. [Ch. 4 instructions to the agent, or of the contract which the agent has entered into with his principal. The agent is also required to protest, in case of nonacceptance or nonpayment, if protest is not forbidden, and to send the protest to the holders." The bank must use reasonable skill and care in taking the steps necessary to charge the parties to the paper,^ and the retention of a check by a collecting bank for several dayfe without presentation or notice of non- payment, or any efforts to collect, renders it liable for any resulting loss.* ^ We have seen that the efforts of the bank must be di- rected towards obtaining payment of the obligation in money,^ and consequently all steps taken by the bank must tend in that direction. § 59. Bank is a "holder" for purposes of collection. The extent of the duties and liabilities of the collect? ing bank as to taking the steps necessary to charge the parties to the paper is epitomized in the rule that, for the purposes of presentment, protest, and notice, the bank is deemed to be a "holder" of the paper.'' On this 3Bartlett v. Isbell, 31 Conn. 296, 299; Tiernan v. Commercial Bank of Natchez, 7 How. (Miss.) 648; Bank of Delaware County v. Broomhall, 38 Pa. St. 135; La Banque Jacciues-Cartier v. La Cor- poration de Limoilou, 17 Rap. Jud. Que. C. S. 211. See, also, ante, § 35. -1 Bank of New Hanover v. Kenan, 76 N. C. 340. See, also, West Branch Bank v. Pulmer, 3 Pa. St. 399; Ivory v. Bank of State, 36 Mo. 475; Costin v. Rankin, 3 Jones (N. C.) 387. 5 See ante, § 46. State Bank of Troy v. Bank of Capitol, 41 Barb. (N. Y.) 343, 27 How. Pr. 57, 17 Abb. Pr. 364; Mead v. Bugs, 5 Cow. Patriotic Bank of Washington v. Farmers' Bank of Alexandria, 2 Cranch, C. C. 560, Fed. Cas. No. 10,811. ■'<« Haddock v. Citizens' Nat. Bank, 53 Iowa, 542, 5 N. W. 766, citing Mechanics' Bank at Baltimore v. Merchants' Bank at Boston, 6 Mete. (Mass.) 13. (]14-) Ch. 4] CHARGING PARTIES. § 68 admissible, on behalf of a bank sued for not duly de- manding payment of a note, that it was the custom of defendant and of all other banks in the same city to keep notes until the close of business hours, and, if not paid at the end of such time, to put them in the hands of a notary, and that this custom was followed by de- fendant in case of the note in suit.^^ § 68. Protest. The collecting bank's position as a "holder" for pur- poses of collections^ requires it to duly protest dishon- ored paper, and renders it liable for any damages sus- tained by its failure to protest it.^^ The term "protest," when used hj the depositor of paper for collection in his instructions to the bank, and in its popular sense, means "simply a demand of pay- ment in proper form, and at a proper time ; and, in case of nonpayment, due and reasonable notice to the indors- ers by the bank, or any of its clerks or servants, or other suitable person."'^* Tu other words, it requires the bank to take steps essential to charge the drawer and in- 01 Warren Bank v. Suffolk Bank, 10 Cush. (Mass.) 582. In this ■case it was shown that defendant had been plaintiffs' collecting agent for more than ten years, and had invariably placed their notes in the hands of a notary for demand and protest, and that plaintiffs knew of the custom. 52 See ante, § 59. =3 Chapman v. McCrea, 63 Ind. 360; American Express Co. v. Haire, 21 Ind. 4; Steele v. Russell, 5 Neb. 211; Thompson v. State Bank, 3 Hill (S. C.) 77, Riley's Law Cases, 81; Coghlan v. Dins- more, 22 N. Y. Super. Ct. 453; City Nat. Bank of Dayton v. Clinton County Nat. Bank of Wilmington, 49 Ohio St. 351, 30 N. B. 958. 5-iAyrault v. Pacific Bank, 47 N. Y. 570, 575, affirming 29 N. Y. Super. Ct. 337. (115) § 69 BANK COLLECTIONS. [Ch 4 dorsers.^" But, generally speaking, a collecting b^nt, not specifically instructed in the matter, is bound to protest the paper only ^vhen protest is necessary to pre- serve the owner's recourse against the parties contin- gently or secondarily liable to him.^® Sometimes specific orders are given to the bank not to protest the paper. But, on an issue as to whether such orders had been given, where the collection clerk had testified that he had received such orders, and made a contemporaneous note to that effect in the collection book, and the book was in evidence, testimony that the clerk was cautious and careful, and had not previously made any mistakes, is immaterial.^^ § 69. Excuses and defenses. It is a good defense on the part of a bank sued for not protesting drafts that, before the drafts in question were sent to it, it had notified plaintiff not to send any more drafts marked "protest," and that, pursuant to such notice, many drafts not so marked had been re- ceived from plaintiff, and had not been protested, and that many of them had been collected after maturity, and the proceeds remitted to plaintiff.^^ But a bank sued for failing to take proper steps to charge indorsers cannot defend pro tan to on the ground that the maker, 55 Wood River Bank v. First Nat. Bank of Omaha, 36 Neb. 744. 56 West Brancli Bank v. Fulmer, 3 Pa. St. 399. See, also, Port- house V. Parker, 1 Camp. 82; Taylor v. Young, 3 Watts (Pa.) 344; Gowan v. Jackson, 20 Johns. (N. Y.) 176. 5T Jagger v. National German American Bank of St. Paul, 53 Minn. 386, 55 N. W. 545. 58 First Nat. Bank of Arkansas Pass v. St. Charles Sav. Bank (Tex. Civ. App.) 37 S. W. 768. (116) Ch. 4] CHARGING PARTIES. § 70 who was indebted to the indorsers, paid them, before maturity of the note, a part of the amount thereof, on their promise to pay the note at maturity, and give him additional credit, since the paj'^ment was for the benefit of the maimer, and not of the holder.^^ And a banlt which lias undertaken to collect notes delivered to it for that purpose is not excused from liability for negli- gence in failing to protest them by the fact that its of- fice building was burned, and the affairs of the bank confused thereby.'''' If, however, a note is made a special deposit, and placed in the private envelope of the depositor, to which he had access at all times, the bank is not liable for a failure to protest, whereby the indorser was dischar- ged."^ § 70. Notice of dishonor. One of the principal steps, or perhaps the principal step, in the process of protesting, as defined above, is the giving of notices of dishonor to the proper parties. Here, again, we refer the reader to the general works on bills and notes or negotiable instruments, for the gen- eral rules applying to all holders, whether banks or not. These general rules a collecting bank is, of course, pre- sumed to know. It should know, for instance, that it 59 Coghlan v. Dinsmore, 22 N. Y. Super. Ct. 453. 60 Merchants' State Bank v. State Bank of Phillips, 94 Wis. 444, 69 N. W. 170. siBohl V. Carson, 63 Fed. 26, 32, 11 C. C. A. 16, 22 U. S. App. 493; New Orleans Canal & Banking Co. v. BscofiSe, 2 La. Ann. 830, 832. There was also evidence in the case last cited that the bank was directed not to protest, at the time the notes were deposited for safe-keeping. (117) § 70 BANK COLLECTIONS. [Ch. 4 is liable if it fails to notify its principal of the nonac- ceptance of the bill;®^ and that it must give notice of nonacceptance to the indorsee of a sight draft, though the drawer is insolvent."^ But a failure to give notice to the drawer that, on presentment for acceptance, the drawee was not found at home, is not such negligence as discharges the drawer.®* The bank should know, too, that its position as "hold- er" for collection requires it to give proper notices of dishonor, and renders it liable for default in this re- spect."^ And the notices should be in the proper legal form, and actually delivered or properly mailed to the proper parties ; for mere knowledge on their part of dis- honor is not equivalent to notice.®'^ The rule is different, however, in Pennsylvania, where it has been held that if the indorser actually receives notice of dishonor, accidentally or otherwise, in due time, the collecting bank is excused from liability for failure to give the notice.®'' 62 Exchange Nat. Bank of Pittsburgh v. Third Nat. Bank of New York, 4 Fed. 20. 63 Citizens' Nat. Bank of Lawrenceburg v. Third Nat. Bank of Greensburg, 19 Ind. App. 69, 49 N. E. 171.' 64 Bank of Washington v. Triplett, 1 Pet. (U. S.) 25, 35. 65 Pabens v. Mercantile Bank, 23 Pick. (Mass.) 330, 34 Am. Dec. 59; Mead v. Bngs, 5 Cow. (N. Y.) 303; Manchester Bank v. Pel- lows, 28 N. H. 302; Sheldon v. Benham, 4 Hill (N. Y.) 129; Burn- ham V. Webster, 19 Me. 232; Blakeslee v. Hewett. 76 Wis. 341; Chapman v. McCrea, 63 Ind. 360; City Nat. Bank of Dayton v. Clinton County Nat. Bank of Wilmington, 49 Ohio St. 351, 30 N. E. 958; Thompson v. State Bank, 3 Hill (S. C.) 77, Riley's Law Cases, 81. 66 Jagger v. National German American Bank of St. Paul, 53 Minn. 386, 55 N. W. 545. 67 Hallowell v. Curry, 41 Pa. St. 322, 328. (118) Ch. 4] CHARGING PARTIES. § 70 It has also been held in that state that, where the in- dorsers were also the makers of a note, not payable at any particular place, the collecting bank is not charge- able with negligence in not giving them notice, the fact of dishonor having been known to them.''* But it is believed that the Pennsylvania rule is too lenient with the bank, and too loose altogether. It is much the bet- ter rule that formal notice be given to all parties en- titled to notice. A bank on which a check is drawn, after having re- ceived the same for collection, is liable to the sender for any damages caused by its failure to give to the drawer notice of nonpayment.®^ And a bank agreeing to col- lect paper payable at a distance for a certain per cent, of the amount of the paper must give timely notice of nonpayment to the sender.'^" A bank ordered to protest paper if not paid should give notice of nonpayment to the bank which sent the paper not later than the next day after dishonor; and if it holds the paper for two days to enable the drawer to provide funds, it is liable as on an implied acceptance of the paper. '^^ While a bank may sometimes justify its course under a general custom of banks, a bank, after having aban- 68 West Branch Bank v. Fulmer, 3 Pa. St. 399. See, also. Port- house V. Parker, 1 Camp. 82; Taylor v. Young, 3 Watts (Pa.) 344; Gowan v. Jackson, 20 Johns. (N. Y.) 176. 69 Exchange Bank of Wheeling v. Sutton Bank, 78 Md. 577, 28 Atl. 563, 23 L. R. A. 173. ''» Wingate v. Mechanics' Bank, 10 Pa. St. 104. 71 Wood River Bank v. First Nat. Bank of Omaha, 36 Neb. 744, 55 N. W. 239; First Nat. Bank of Northumberland v. McMichael, 106 Pa. St. 460. (119) § 71 BANK COLLECTIONS. [Ch. 4 doned a custom of giving notice of dishonor by mail, where the indorser and holder lived in the same town, cannot rely on such custom, though it is still followed by other banks.^^ § 71. What indorsers entitled to notice from bank. The collecting bank need not notify all prior parties, but need only notify its own principal or immediate indorser.'''^ So, it has been held that, in the absence of special agreement, a correspondent which, has received for collection from the initial bank a note indorsed by the initial bank, and by a prior indorser, the initial bank appearing by the indorsements to be the owner of the paper, is bound, after demand of payment and dis- " Isbell V. Lewis, 98 Ala. 550, 13 So. 335. 73McCullock V. Commercial Bank, 16 La. 566; State Bank of Troy V. Bank of Capitol, 41 Barb. (N. Y.) 343, 27 How. Pr. 57, 17 Abb. Pr. 364; Cardwell v. Allan, 33 Grat. (Va.) 167; Phipps v. Millbury Bank, 8 Mete. (Mass.) 79; Colt v. Noble, 5 Mass. 167; Eagle Bank V. Chapin, 3 Pick. (Mass.) 180; Mead v. Bngs, 5 Cow. (N. Y.) 303; Haynes v. Birka, 3 Bos. & P. 599; Firth v. Thrush, 8 Barn. & C. 387. • Contra, see Smedes v. Bank of Utica, 20 Johns. (N. Y.) 372, hold- ing that the bank must notify all indorsers. An indorsee who delivered the note to an express company for collection without any indorsement to the company is neverthe- less entitled to due notice of nonpayment. Rosson v. Carroll, 90 Tenn. 90, 16 S. W. 66, 12 L. R. A. 727. ' That a collecting bank as indorser for collection is entitled to notice, see McNeil v. Wyatt, 3 Humph. (Tenn.) 125; Seaton v. Scovill, 18 Kan. 435. For effect of intermediate agency for collection on time required for notice to successive obligors, see Slack v. Longshaw, 8 Ky. Law Rep. 166; Warren v. Oilman, 17 Me. 360; McNeil v. Wyatt, 3 Humph. (Tenn.) 125. (120) Oh. 4] CHARGING PARTIES. § 72 honor, to give due notice to the initial bank, in order to enable it to give due notice to such parties as it intended to look to for payment, and is not bound to notify the prior indorser.'^* And, in the absence of custom or usage to that effect, the mere fact that the bank under- takes to send notices to prior parties, while some evi- dence of a special agreement to notify them, is not suf- ficient evidence of such an agreement.^^ Nor can a second indorser, to whom the collecting bank has given due notice of protest, on taking up the note, sue the bank for not notifying the first indorser, as the bank," if responsible at all, is responsible only to its principal.^" ^ 72. Owner may sue bank without first suing indorser. Indorsers, legally discharged by a presentment by the •collecting bank without grace, of a note entitled to grace, will be presumed to intend to avail themselves of the discharge if sued; hence plaintiffs are not bound to in- stitute a fruitless suit against them before suing the bank for negligence.^' On the same theory, the owner '* Phipps V. Millbury Bank, 8 Mete. (Mass.) 79. Where the executors of a deceased indorsee (the payee) had duly ■qualified before maturity of the note, and notices of protest had been mailed by the initial bank to the correspondent bank to be sent to the indorsers, but neither such executors nor a surviving indorser were served with the notices, the latter bank is liable for any loss sustained by the holder of the note. Bird v. Louisiana State Bank, 93 U. S. 96, 23 L. Ed. 818. T-. State Bank of Troy v. Bank of Capitol, 41 Barb. (N. Y.) 343, 27 How. Pr. 57, 17 Abb. Pr. 364. 78 McCullock V. Commercial Bank, 16 La. 566. 7T Mechanics' Bank at Baltimore v. Merchants' Bank at Boston, « Mete. (Mass.) 13, 26. (121) § 73 BANK COLLECTIONS. [Ch 4- may sue the bank for negligence in failing to protest or give notice before suing the indorser.'^^ § 73. Enforcement of paper taken in payment. We have seen that, in the absence of special agree- ment or binding custom, the collecting bank, in accept- ing paper instead of money in payment, does so at its own risk. It behooves the bank, then, for its own jjro- tection, as well as for the benefit of the owner, to use diligence in obtaining payment of paper so received.''* So, a bank receiving a check of the drawee of a draft,, and surrendering the draft, should present the check on the day of its receipt.*" It is also liable to the depositor of paper for collec- tion for any loss sustained by its negligence in failing to protest, on nonpayment, a draft received by it in payment of the collection.*^ ,A peculiar case involving the duty of the bank to en- force paper received in payment was recently decided in Colorado. A deed and a check for the price of the land to be conveyed were deposited with defendant bank, with instructions to deliver the deed on col- lection of the check, which Avas on a bank in an- other state. The latter bank mailed to defendant bank its draft for the amount, less exchange, payable to- Ts D'owner v. Madison County Bank, 6 Hill (N. Y.) 648; Canonge- V. Louisiana State Bank (La.) 3 Mart. (N. S.) 344. 70 See ante, §§ 46, 47. 80 Nunnemaker v. Lanier, 48 Barb. (N. Y.) 234. See, also. First Nat. Bank of Meadville v. Pourtli Nat. Bank of New York City, 77" N. Y. 320, 33 Am. Rep. 618. 81 Capitol State Bank v. Lane, 52 Miss. 677. (122) Ch. 4] CHARGING PARTIES. | 74 defendant bank, but, pursuant to request from the drawer of the check, made while the draft was in the mails, defendant bank returned the draft to him. It was held that defendant bank had no authority to return the draft, and that, by its wrong- ful act in so doing, it estopped itself to deny receipt of the proceeds of the check, and that, since the mailing constituted a delivery, defendant bank held the pro- ceeds in trust for the owner of the check.^^ In this case, an attempt was made to apply the doctrine of stoppage in transitu, but the court held that the doc- trine did not apply because the mailing of the draft, under the circumstances, constituted a delivery.^^ § 74, Return of dishonored paper. The collecting bank is bound to return dishonored pa- per within a reasonable time.^* If it does not, after having given absolute credit therefor, it will be con- sidered as a debtor for the amount of the paper.^^ The retention of a sight draft for forty-seven days with- out informing the sender of nonpayment or of the in- 52 Gregg V. Bi-Metallic Bank, 14 Colo. App. 251, 59 Pac. 852. 53 Gregg V. Bi-Metallic Bank, 14 Colo. App. 251, 59 Pac. 852. See, also, Whiting v. City Bank of Rochester, 77 N. Y. 363; MuUer v. Poudir, 55 N. Y. 325; Canterbury v. Bank of Sparta, 91 Wis. 53, 64 N. W. 311. siKirkham v. Bank of America, 165 N. Y. 132, 58 N. B. 753, affirming 26 App. Div. 110, 49 N. Y. Supp. 767; Kershaw v. Ladd, 34 Or. 375, 56 Pac. 402; Mound City Paint & Color Co. v. Com- mercial Nat. Bank of Ogden, 4 Utah, 353, 9 Pac. 709; Whitney v. Merchants' Union Exp. Co., 104 Mass. 152, 6 Am. Rep. 207. 85 Kirkham v. Bank of America, 165 N. Y. 132, 58 N. E. 753. See, also, other cases cited In preceding note. (123) § 74 BANK COLLECTIONS. [Ch. 4 ability to collect by reason of the insolvency of the drawee, which was known to the bank, renders the bank liable for the loss sustained.®® An interesting decision, recently affirmed in the New York court of appeals, involved the following state of facts : Defendant bank forwarded a draft, left by a regular customer for collection, to its agent at the place of payment, and the latter received the drawee's sight draft on its correspondent in another city in payment, and defendant credited the depositor with the amount of the draft. The sight draft was not paid, and the depositor demanded the return of the original draft, or the remittance of the amount thereof. The credit was Anally canceled by the bank about a month after it knew of the dishonor of the second draft, during which time defendant repeatedly requested the depos- itor to try to get the drawee to provide funds to meet it. The original draft was not returned. It was held that the bank was liable for the amount of such draft. In this case, the court said: "To justify it in canceling that credit, or refusing to pay on demand, it was at least bound to deliver to him the draft properly pro- tested, so as to charge the drawer, and, in the absence of such return of the draft, it was liable for the money." *^ The same rule has been applied to express companies, and it has been held that, where a draft is sent to an express company with instructions to return it at once se Mound City Paint & Color Co. v. Commercial Nat. Bank of Ogden, 4 Utah, 353, 9 Pac. 709. ST Kirkham v. Bank of America, 26 App. Div. 110, 49 N. Y. Supp. 767, affirmed in court of appeals, 165 N. Y. 132, 58 N. E. 753. (124) Ch. 4] CHARGING PARTIES. § 75 if not paid, the company is liable for the loss occasioned to the drawer by retaining the draft in its possession for four days without presentment, in order that the drawee might make inquiries as to a supposed mistake in the amount of the draft, the drawee having become insolvent in the meantime.**^ But a failure of the col- lecting bank to return to the drawer a dishonored check until after the insolvency of the drawee is not action- able negligence if the drawer was, nevertheless, enabled to and did sue the drawee without it.^® The question of negligence of a bank in failing to return an accepted bill after nonpayment by the ac- ceptor until after the acceptor became insolvent is for the jury.^" § 75. Effect of custom. The duties and responsibilities of the collecting bank with respect to an immediate return of dishonored pa- per may be modified by proof of custom, and it has been held that one sending paper to a bank for collection without special instructions is bound hy a custom of the bank to hold paper sent for collection for some time after presentment in case it receives a promise of pay- ment.^^ 88 Whitney v. Merchants' Union Exp. Co., 104 Mass. 152, 6 Am. Rep. 207. P9 Kershaw v. Ladd, 34 Or. 375, 56 Pac. 402. 90 Pox V. Davenport "Nat. Bank, 73 Iowa, 649, 35 N. W. 688. In this case it was held proper to refuse to submit to the .iury the question of negligence in failing to present or collect the bill. 91 Sahllen v. Bank of Lonoke, 90 Tenn. 221; 16 S. W. 373. Effect of custom as to time and manner of presentment for pay- ment, see ante, § 67. (125) § 76 BANK COLLECTIONS. [Ch. 4 § 76. Ratification and waiver of negligence of bank. The same general rules applied above to the waiver of the negligence of the collecting bank in other par- ticulars"^ apply to its negligence in taking the neces- sary steps to charge the parties. Accepting and acting on the negligent conduct of the bank with full knowl- edge of the facts amounts to a waiver or ratification here as well as there."^ So, where the collecting bank notified, by mail, the drawee, who resided in the coun- try at some distance from the bank, in accordance with its usual custom, and later notified the sender that the drawee had called at the bank, and, on presentment, had. accepted the draft and stated that he could not pay it before the next week, and the sender allowed the draft to remain in the bank without further in- structions until the next week, when the drawee became insolvent, the bank is not chargeable with negligence."* But ignorance of negligence or of a material part of it materially alters the rule."^ Thus, a promise to pay the note, made by an indorser after his discharge by the negligence and laches of defendant bank in failing to protest and give notice, but without knowledge of such laches, and the consequent discharge, is not bind- ing;"^ and an indorser who actually paid the note to 92 See ante, § 57. 93 See Hobbs v. Straine, 149 Mass. 212, 21 N. B. 365. 94 Grouse v. First Nat. Bank of Penn Yan, 137 N. Y. 383, 33 N. E. 301, affirming 61 Hun, 618, 15 N. Y. Supp. 498. «'• See, also, ante, § 57. ixi City Nat. Bank of Dayton v. Clinton County Nat. Bank of Wil- mington, 49 Ohio St. 351, 360, 30 N. E. 958; Tebbetts v. Dowd, 23 Wend. (N. Y.) 379. Aliter of a promise made with knowledge of the facts. See Hobbs v. Straine, 149 Mass. 212, 21 N. E. 365. (12(0 Smedes v. Bank of Utica, 20 Johns. fN. Y.) 372, 385. 5 Fay V. Strawn, 32 111. 295. « Minneapolis Sash & Door Co. v. Metropolitan Bank, 76 Minn. 136, (133) § 78 BANK COLLECTIONS. [Ch. 5 On the question of the suitableness of the bank pri- marily liable on paper to be made agent for its col- lection, or, in other words, the propriety of sending paper directly to such bank for collection, the Colorado supreme court says : "Even if we can conceive of such an anomaly as one bank acting as the agent of another to make a collection against itself, it must be apparent that the selection of such an agent is not sanctioned by businesslike prudence and discretion. How can the debtor be the proper agent of the creditor in the very matter of collecting the debt? His interests are all adverse to those of his principal. If the debtor is em- barrassed, there is the temptation to delay ; if wanting 78 N. W. 980, 44 L. R. A. 504; German Nat. Bank of Denver v. Burns, 12 Colo. 539, 21 Pac. 714; Drovers' Nat. Bank v. Anglo-American Packing & Piovision Co., 117 111. 100, affirming 18 111. App. 191; First Nat. Bank of Bvansville v. Fourth Nat. Bank of Louisville, 56 Fed. 967, 6 C. C. A. 183, 16 U. S. App. 1; National Bank of Com- merce of Seattle v. Johnson, 6 N. D. 180, 69 N. W. 49; First Nat. Bank of Chicago v. Citizens' Sav. Bank of Detroit (Mich.) 82 N. W. 66; Givan v. Bank of Alexandria (Tenn. Ch.) 52 S. W. 923; Lowenstein v. Bresler, 109 Ala. 326, 19 So. 860; Merchants' Nat. Bank of Philadelphia v. Goodman, 109 Pa. St. 422, 2 Atl. 687; Wag- ner V. Crook, 167 Pa. St. 259, 31 Atl. 576; Anderson v. Rodgers, 53 Kan. 542, 36 Pac. 1067, 27 L. R. A. 248, and notes; First Nat. Bank of Corsicana v. City Nat. Bank of Dallas, 12 Tex. Civ. App. 318, 34 S. W. 459; Western Wheeled Scraper Co. v. Sadilek, 50 Neb. 105, 69 N. W. 765; 1 Daniel, Neg. Inst. 328a. The negligence of a bank in selecting the drawee of a check as its agent for collection thereof is matter of defense in an ac- tion by the bank against the drawers of the check to whom it had paid value therefor, and should be set up in the answer. Nebraska Nat. Bank v. Logan, 29 Neb. 278, 45 N. W. 459. Bntrusting«ia check to the drawee for collection does not operate as an extinguishment or payment of the check. Lowenstein v. Bresler, 109 Ala. 326, 19 So. 860. (134) Ch. 5] EMPLOYMENT OF AGENTS, ETC. § 78 in integrity, there is the opportunity to destroy and deny the evidence of tlie indebtedness." '^ In arguing this same point, the supreme court of Illinois says : "The same person cannot be both debtor and creditor at the same time, and in respect of the same debt. How, then, can he who is debtor be at the same time and in respect of the same debt the dis- interested agent of the creditor? Can it be said to be reasonable care in selecting an agent to select one known to be interested against the principal? To place the principal entirely in the hands of his adver- sary? The interest of the creditor when his debtor is failing is that steps be taken promptly and prosecuted with vigor to collect his debt. But at such a time the inclination of the creditor .quite often, and it may be sometimes his interest, too, is to proscrastinate. The debtor may often be interested in bringing about a com- promise with his creditors, whereby his debt may be discharged for less than its face, but the creditor whose debt can all be collected by legal proceedings can never be interested in producing that result. Surely it could not be held reasonable care and diligence in an agent, holding for collection the promissory note given by one individual to another individual, to send the promissory note to the maker, trusting to him to make payment, delay it, or destroy the evidences of indebtedness and repudiate the transaction, as his conscience might per- mit. If this would not be held to be reasonable care 7 German Nat. Bank of Denver v. Burns, 12 Colo. 539, 21 Pac. 714, distinguishing People v. Merchants' & Mechaiics' Bank of Troy, 78 N. Y. 269, and Indig v. National City Bank of Brooklyn, 80 N. Y. 100. (135) § 78 BANK COLLECTIONS. [Ch. 5 and diligence, why should the same conduct be held to be reasonable care and diligence when applied to a bank?"« The bank is liable in case loss occurs because of send- ing the paper directly to the drawee or the party to make payment, though it notified its customer, on re- ceiving the paper for collection, that it would act mere- ly as agent for him, and would assume no liability from the negligence or omissions of subagents, to whom it might forward the paper for collection, as it was bound to exercise reasonable care and diligence in adopting a method of presenting the paper to its drawee for pay- ment.* It is unquestionablj'^ negligence for a bank to send a customer's check, intrusted to it for collection, directly to the drawee bank, if there is, in the same town, an- other bank in good standing and credit.^" The rule holds good, also, though the drawee bank was the only bank in good standing," or actually the only bank,^^ at the place of payment. The general rule is modified and sometimes wholly nullified by the instructions sent with the paper. Thus, 8 Drovers' Nat. Bank v. Anglo-American Packing & Provision Co., 117 111. 100, 107. s> Minneapolis Sash & Door Co. v. Metropolitan Bank, 76 Minn. 136, 78 N. W. 980, 44 L. R. A. 504. loFarwell v. Curtis, 7 Biss. 160, Fed. Cas. No. 4,690; Western Wheeled Scraper Co. v. Sadilek, 50 Neb. 105, 69 N. W. 765. See, also, cases cited in note 6, supra. 11 Minneapolis Sash & Door Co. v. Metropolitan Bank, 76 Minn. 136, 78 N. W. 980, 44 L. R. A. 504, Start, C. J., dissenting. 12 American Exchange Nat. Bank of Lincoln v. Metropolitan Nat. Bank of Kansas City, 71 Mo. App. 451. (136) Ch. 5] EMPLOYMENT OF AGENTS, ETC. g 78 where a certificate of deposit issued by a private banlvcr at B. was sent to a bank in D. for collection, with a statement by the sender that, "We note you have a correspondent at B.," and a direction to obtain the lowest rate of exchange possible, the collecting bank was not negligent because it sent the certificate directly to the banker at B., where it appeared that he con- ducted the only bank at B., and was the only corre- spondent there of the collecting bank, which fact was known to the sender, and the lowest rate of exchange could be obtained only by sending the paper to him.^^ The rule making it prima facie negligence to send the paper direct to the party primarily liable does not ap- ply where a draft was sent to the drawee bank merely to secure identification of the signature of the drawer, he having been unable to obtain identification of his signature in any other manner.^* So, where there was evidence that a stranger presenting a draft for collec- tion was AvhoUy unable to identify himself or his sig- nature, and that the collecting bank, with his consent, sent the draft to the drawee bank for identification of the signatiire, it was error to charge that under the evidence there was no need of forwarding the draft, to any place for identification of the signature.^^ On the question whether the liability of the bank is affected by the fact that the result would have been the same if it had sent the pajjer through proper chan- nels, there is a difference of opinion ; the courts of Mis- 13 First Nat. Bank of Chicago v. Citizens' Sav. Bank of Detroit >(Mich.) 82 N. W. 66. iJ Davis V. First Nat. Bank of Fresno, 118 Cal. 600, 50 Pac. 666. 15 Davis V. First Nat. Bank of Fresno, 118 Cal. 600, 50 Pac. 666. (137) § 79 BANK COLLECTIONS. [Ch. 5 sourP" and Minnesota^' holding that the fact that the paper would probably have met the same fate if sent to a third person for collection is immaterial ; and those of Texas, holding that negligence of the collecting bank in sending a draft directly to the drawee is offset by a showing, with reasonable certainty, that had the draft been sent properly, through a third person, its fate would have been the same.^^ But before the failure of the drawee, the fact that, if the collecting bank had delayed sending a draft for the extreme limit of time allowable, without being chargeable with negligence, the paper would not have reached its destination be- fore the failure of the drawee, will not excuse it from liability for negligence in sending it directly to the drawee, where it also appears that if it had been sent properly to a third person for collection at the time it was sent to the drawee, it would have been col- lected." § 79. Effect of custom. The weight of judicial authority in America is to the effect that no custom among banks to send checks and drafts, payable at other banks at distant points, to the drawee directly, by mail, will excuse or justify the bank in so sending the paper, since such a custom is un- 16 American Exchange Nat. Bank of Lincoln v. Metropolitan Nat. Bank of Kansas City, 71 Mo. App. 451. 17 Minneapolis Sash & Door Co. v. Metropolitan Bank, 76 Minn. 136, 78 N. W. 980, 44 L. R. A. 504. ' 18 First Nat. Bank of Corsicana v. City Nat. Bank of Dallas, 12 Tex. Civ. App. 318, 34 S. W. 458. 10 First Nat. Bank of Corsicana v. City Nat. Bank of Dallas, 12; Tex. Civ. App. 318, 34 S. W. 458. n38) Ch. S] EMPLOYMENT OF AGENTS, ETC. § 79 reasonable and opposed to the policy of the law.^" But there are American cases holding that a general and universal custom among banks to send paper payable in a distant city, where they have no correspondent, directly to the drawee bank in that city, will relieve a bank from liability for sending an ordinary unindorsed check, delivered to it for collection and deposit, di- rectly to the drawee for payment, such a custom being reasonable and lawful.^^ In England, the courts uphold broadly a custom of this kind, and have held that a London bank having no agent in Jersey is not negligent in sending a check, payable there, directly to the drawee bank, it being the custom of London bankers to so present checks on foreign drawees in case they have no agent at the place of payment.^^ A custom of sending the paper to the drawee, not for collection, but for a special lawful purpose, has been properly sustained by the supreme court of California, which holds that a bank sued for negligence in sending a draft direct to the drawee bank 20 Drovers' Nat. Bank v. Anglo-American Packing & Provision Co., 117 111. 100, affirming 18 111. App. 191; Merchants' Nat. Ba-ik of Philadelphia v. Goodman, 109 Pa. St. 422, 2 Atl. 687; Minneapolis Sash & Door Co. v. Metropolitan Bank, 76 Minn. 136, 78 N. W. 980, 44 L. R. A. 504; American Exchange Nat. Bank of Lincoln v. Metropolitan Nat. Bank of Kansas City, 71 Mo. App. 451. 21 Kershaw v. Ladd, 34 Or. 375, 56 Pac. 402; Indig v. National City Bank of Brooklyn, 80 N. Y. 100, 104. The decision in the case last cited was based partly on the fact that no damage was shown. See, also, dissenting opinion of Start, C. J., in Minneapolis Sash & Door Co. V. Metropolitan Bank, 76 Minn. 136, 78 N. W. 980, 44 L. R. A. 504. 22Heywood v. Pickering, L. R. 9 Q. B. 428; Bailey v. Bodenham, 16 C. B. (N. S.) 288. (139) § 80 BANK COLLECTIONS. [Qh. 5 for identification of the signature of the drawer, the cheek having been lost while in possession of the drawee bank, should be allowed to show the custom and usage of banks in regard to the identification of strangers presenting paper for collection, and that it followed such custom as to the draft in suit.^* § 80. Contracts and dealings between banks in general. There are a few general rules governing the deal- ings between the initial and the correspondent bank, which are of considerable importance. One is that, in contracting for mutual arrangements for collections, banks are presumed to agree that each will act accord- ing to the general well-established and recognized rules and customs of the banking business.'* Another is that there is an implied agreement that the funds realized shall be mingled with the general funds of the collect- ing bank; and this rule is perfectly consistent with an express agreement between the banks for daily remit- tances.^^ A third rule is that an implied agreement to continue in business as a bank enters into the ex- press contracts between banks for mutual services in making collections, and, after its failure, the collecting bank has no authority to act in the matter, much less to receive paj^ment.^" 23 Davis V. First Nat. Bank of Fresno, 118 Cal. 600, 50 Pac. 666. 2* First Nat. Bank of Richmond v. Davis, 114 N. C. 343, 19 S. B. 280, 41 Am. St. Rep. 795; Planters' & Farmers' Nat. Bank of Baltimore v. First Nat. Bank of Wilmington, 75 N. C. 534; Marine Bank v. Fulton Baiik, 2 Wall. (XJ. S.) 252. 25 First Nat. Bank of Richmond v. Davis, 114 N. C. 343, 19 S. B. 280, 41 Am. St. Rep. 795. 26 Manufacturers' Nat. Bank v. Continental Bank, 148 Mass. 553, (140) CIj. 5] EMPLOYMENT OF AGENTS, ETC. g 81 § 8.1. Employment of notaries, and liability for their acts and defaults. There is no doubt but that the collecting bank may avail itself of the services of a notary in making its collection ;^^ and one employed by the cashier of the collecting bank will be considered as having been cm- ployed by the bank.^® But Avhen it comes to determin- ing the liability or nonliability^ of the bank for the acts and omissions of the notary selected by it, we at once encounter a direct conflict in the authorities; a con- flict primarily growing out of a difference of opinion as to the exact relation between the collecting bank and its customer. We have adopted the bailment theory of the relation,^^ and under this theory, notaries em- ployed by the bank as bailee are its own agents, for whose acts and defaults it is liable.^" This position necessarily involves the adoption of the rule that the bank, in accepting paper for collection, undertakes to "collect" in the full sense of the term, and to perform 20 N. E. 193, 12 Am. St. Rep. 598, 2 L. R. A. 699; First Nat. Bank of Crown Point v. First Nat. Bank of Richmond, 76 Ind. 561, 40 Am. Rep. 261; Cragie v. Hadley, 99 N. Y. 131; Audenried v. Bet- teley, 8 Allen (Mass.) 302. 27 Warren v. Oilman, 17 Me. 360. 28 Warren v. Oilman, 17 Me. 360. Representation of bank by cashier in general, see ante, § 37. 29 See ante, § 2. 8o_Davey v. Jones, 42 N. J. Law, 29, 36 Am. Rep. 505; Thompson V. State Bank, 3 Hill (S. C.) 77, Riley's Law Cases, 81 ; Ayrault V. Pacific Bank, 47 N. Y. 570, affirming 6 Rob. 337, 1 Abb. P- fN. S.) 381; Montillet v. Bank of United States (La.) 1 Mart. (N. S.) 365; Oakey v. Bank of Louisiana, 17 La. 386; Pritchard v. Louisi- ana State Bank, 2 La. 415; Miranda v. City Bank of New Orleans, 6 La. 740, 26 Am. Dec. 493. (141) § 81 BANK COLLECTIONS. [Ch. 5 all acts necessarily incidental to collection ;^^ and it is believed that this rule is sound. As a necessary result of these doctrines, the notary employed by the collect- ing bank is not liable to the owner for his defaults or mistakes in making protest, there being no privity be- tween them.^^ In New York, the custom of employing a notary to make presentment and give notice of dishonor does not excuse the bank from making proper presentment and giving due notice, since the notary is the agent of the bank, and the positive legal duty of the bank and its selected agent cannot be varied by custom.^^ But the majority of the courts of the various states of the Union that have passed on the question, and the federal courts, have adopted the contrary rule, that if the collecting bank uses reasonable care in the selection of the notary, it is not liable for his acts or defaults.^* If, therefore, 31 See ante, § 26, and post, § 116. 32 Oakey v. Bank of Louisiana, 17 La. 386, 388. Contra, see Britton v. NiccoIIs, 104 U. S. 757. See, also, Hyde v. Planters' Bank of Mississippi, 17 La. 560. 33 Ayrault v. Pacific Bank, 47 N. Y. 570, 7 Am. Rep. 489, affirm- ing 6 Rob. 337, i Abb. Pr. (N. S.) 381. See, also, Allen v. Merchants' Bank of New York, 15 Wend. (N. Y.) 482, where it was held that, in the absence of a prior judicial determination of the question, the holder may show that it was customary for a bank receiving paper for collection to assume the obligation to answer for the negligence or default of its agents. 31 First Nat. Bank of Manning v. German Bank of Carroll County, 107 Iowa, 543, 78 N. W. 195; Citizens' Bank of Baltimore v. Howell, 8 Md. 530; Tiernan v. Commercial Bank of Natchez, 7 How. (Miss.) 648; Agricultural Bank v. Commercial Bank of Manchester, 7 Smedes & M. (Miss.) 592; Bellemire v. Bank of United States, 4 Whart. (Pa.) 105; Britton v. NiccoUs, 104 U. S. 766; Warren Bank V. Suffolk Bank, 10 Gush. (Mass.) 582; Stacy v. D'ane County Bank, (142) <3h. 5] EMPLOYMENT OF AGENTS, ETC. R 82 it may properly be said that the rule adopted by the greater number of courts is the better rule of law, the rule that the collecting bank fully performs its duty by using due care in the selection of a notary is cer- tainly the better rule. Pursuant to this latter theory, it has been held that it is presumed that a notary pub- lic, properly commissioned, is a fit person for the col- lecting agent to intrust with the protest of commercial paper ;^^ and that, in the absence of special agreement, the collecting bank, which has turned the paper over for protest to the notary usually employed by it for that purpose, is not liable for his failure to perform his duty.^" § 82. Notary an officer or employe of bank. There is also some difference of judicial opinion on the question of the liability of the bank in case the notary employed by it is a regular officer or employe of the bank. In Nebraska it has been held that where a bank receives a bill for collection, with orders to protest it if not paid, and it is delivered to the presi- dent of the bank, who is also a notary public, for pro- 12 Wis. 629; May v. Jones, 88 Ga. 308, 14 S. E. 552; First Nat. Banh; v. Butler, 41 Oliio St. 519; Isliam v. Post, 141 N. Y. 100, 38 Am. St. Rep. 775, note, 35 N. E. 1084; Mecliem, Agency, § 514; 3 Am. & Eng. Enc. Law (2d Ed.) 808. In Stacy v. Dane County Banli, 12 Wis. 629, tlie notary demanded payment before the note was due, and deposited the notice for the indorser in the postoffice. The indorser was absent from the city, but had a" residence therein. 35 Stacy V. Dane County Banlj, 12 Wis. 629, 635. 36 Citizens' Bank of Baltimore v. Howell, 8 Md. 530, 63 Am. Dec. 714. (143) § 83 BANK COLLECTIONS. [Ch. S test, but such president, with knowledge of the order to protest, delays noting for protest or giving notice for such a time as effects a discharge of the indorsers, the notary is the agent of the bank, and the bank is liable for his default.^^ But in Georgia it has been held that a bank is not liable for the acts of its notary in maliciously and wrongfully publishing the protest of a bill of exchange, though he was also an employe of the bank.^® Here, however, the notary obviously went outside of the scope of the ordinary duties of a notary. How the liability of the bank is affected by the fact that the notary it employs is a public oflflcer, as well as an officer or employe of the bank, is considered in the next section. § 83. Notary a public officer. That a notary is a public officer, one of whose offi- cial duties it is to properly protest negotiable paper delivered to him for that purpose, is deemed by some courts sufficient reason for relieving the collecting bank from all liability for his acts or defaults.^^ Where the sTWood River Bank v. First Nat. Bank of Omaha, 36 Neb. 744, 55 N. W. 239; Commercial Bank of Kentucky v. Barksdale, 36 Mo. 563. 38 May V. Jones, 88 Ga. 308, 14 S. B. 552, 15 L. R. A. 637, 30 Am. St. Rep. 154. 39 Britten v. Niccolls, 104 U. S. 757; Hyde v. Planters' Bank of Mississippi, 17 La. 560; Stacy v. Dane County Bank, 12 Wis. 629; First Nat. Bank of Manning v. German Bank of Carroll County, 107 Iowa, 543, 78 N. W. 195; Baldwin v. Bank of Louisiana, 1 La. Ann. 13; Tiernan v. Commercial Bank of Natchez, 7 How. (Miss.) 648; Agricultural Bank v. Commercial Bank of Manchester, 7 Smedes & M. (Miss.) 592; Bowling v. Arthur, 34 Miss. 41; May v. Jones, 88 Ga. 308, 311. (144) Ch. 5] EMPLOYMENT OF AGENTS, ETC. § gj notary employed is not only a public officer, but also an officer or employe of the bank, the rule in some states is tliat the bank is not liable for his acts or defaults, because his private status is merged in his public status, as to acts prescribed by law as part of his official duties." On this point, Lumpkin, J., speaking for the supreme court of Georgia, says : "The plaintiff's theory is that, as Jones, the notary public, was also an employe and agent of the bank, 'the action of defendant Jones in the matter, he acting under the authority of the de- fendant bank, is the action of said bank.' This is all the allegation touching the bank's liability. Although there is conflict in the cases, the prevailing and better holding seems to be that a bank is not liable for the negligence or misconduct of a notary employed by it to protest negotiable paper. The reason is that the no- tary is not a mere agent or servant of the bank, but is a public officer, sworn to discharge his duties properly. He is under a higher control than that of a private prin- cipal. He owes duties to the public, which must be the supreme law of his conduct. Consequently, when he acts in his official capacity, the bank no longer has control over him, and cannot direct how his duties shall be done. * * * That the notary is also an employe and agent of the bank does not alter the case. There is still a sharp dividing line between his duties as agent and his duties as a public officer. When his *oMay V. Jones, 88 Ga. 308, 311; First Nat. Bank of Manning V. German Bank of Carroll County, 107 Iowa, 543, 78 N. W. 195; Baldwin v. Bank of Louisiana!, 1 La. Ann. 13; Gerhardt v. Boat- man's Savings Inst, 38 Mo. 60, 67. (145) § 84 BANK COLLECTIONS. [Ch. 5 public service comes into play, his private service is for the time suspended."*^ But it is also held that if the statutes of the state where the notary was appointed do not authorize or require him to protest commercial paper, the bank is liable for his acts and defatilts, the reason being that he is not, in such case, acting in an official capacity.*^ Thus, where the notary was regu- larly employed by the bank at a fixed salary, and the instrument regarding which he was negligent was a negotiable note, which could be protested by any per- son under the statutes of the state, the bank is liable for his negligence, though he is also a public officer, as, in the case at hand, it was not necessary to employ him, and he' therefore acted as the bank's agent, and not as an independent officer.*^ Another doctrine under which the bank is relieved from liability is that, though the notary employed by the collecting bank be a regularly commissioned public officer, the owner impliedly consents to his employment by the bank as part of the contract of collection, and thus makes the notary his subagent, for whose de- faults the bank is not chargeable.** § 84. Employment of agents other than notaries and banks, and liability for their defaults. In Kansas, the rule determining the liability of the collecting bank for defaults of its selected agents other *i May V. Jones, 88 Ga. 308, 311. 12 Allen V. Merchants' Bank of New York, 22 Wend. (N. Y.) 215, 34 Am. Dec. 289; Gerhardt v. Boatman's Savings Inst., 38 Mo. 60, 67; Bank of Llnsborg v. Ober, 31 Kan. 599, 3 Pac. 324. 43 Gerhardt v. Boatman's Savings Inst., 38 Mo. 60, 67. 4-1 Pa-ik V. Butler, 41 Ohio St. 519, 52 Am. Rep. 94. (146) Ch-5] EMPLOYMENT OF AGENTS, ETC. 8 84 than notaries or correspondent banks is found in a de- cision holding that a collecting bank, whose only in- structions were, "when due, collect, and apply proceeds to my paper," is liable to the depositor of the paper for the default of one voluntarily selected by the bank to make presentment, who collected the amount of the paper, but failed to turn over the proceeds; such per- son being the agent of the bank only.*^ In a case where the bank either lost a note sent to it for collection, or negligently permitted it to get into the hands of an unauthorized person, Mho collected it, it was held that an agency between such person and the bank could not be shown by evidence of his declarations to that effect, there having been no prior evidence estab- lishing a prima facie case of agency.*" (B) Liability of Initial Bank for Default of Cor- respondent. There is an irreconcilable conflict of authority on the ques- tion of the liability of the initial collecting bank for the acts and defaults of its correspondent bank. The rule in force in England, and adopted in New York and several of the other states, is that the initial bank is liable for the defaults of its selected correspondent, on the ground that the correspondent is the agent of the initial bank only. This rule is consistent with the bailment theory of the relation between the initial hank and its customer. On the other hand, the rule in force in Massachusetts, and followed in many of the states, is that the owner of paper *!■ First Nat. Bank of Girard v. Craig, 3 Kan. App. 166, 42 Pac. 830; Cummins v. Heald, 24 Kan. 600. See, also, Bank of Linds- borg V. Ober, 31 Kan. 599, 3 Pac. 324. *6 McClure v. D. M. Osborne & Co., 86 111. App. 465. (147) § 85 BANK COLLECTIONS. [Ch. 5 payable at a distance, by depositing it in a local bank for col- lection, impliedly assents to the employment of a bank at the place of payment, and that, consequently, the correspondent is an agent of the owner, and that the initial bank is not liable for its defaults if it used due care in selecting the correspond- ent. The rule that the initial bank is liable for the defaults of its correspondents may be modified or negatived by proof of a special agreement to the contrary. Some courts hold that such rule may be negatived by proof of a general custom to the contrary. As a necessary corollary to the rule that the initial bank is liable for the defaults of its correspondent is the rule that the initial bank has a remedy over against the correspondent for all such defaults of the latter as render the former liable to the owner. § 85. In general. The question of the liability of the initial collecting bank for the acts or defaults "of its correspondent bank in making or failing to make the collection is one that presents a conflict of authorities which is absolutely irreconcilable. One line of authorities holds that, in the absence of special agreement to the contrary, a bank receiving for collection paper payable at a distance is liable for the acts and defaults of its correspondents; the other line of authorities exonerates the initial bank if it has used reasonable care in the selection of the correspondent. We shall defer drawing any conclusions as to which is the better doctrine until we have thoroughly ex- amined all the cases, and have set forth at length and examined the reasoning used to sustain each doctrine. (148) Ch. 5] EMPLOYMENT OP AGENTS, ETC. § 87 § 86. England. The court of king's bench, in Van Wart v. Woolley,*'' briefly but emphatically lays down the rule that the initial bank is liable for the defaults of its chosen cor- respondent; and, in a later case,** the house of lords affirmed the n^le, without qualification, using the old maxim, qui facit per alium, facit per se. § 87. Federal courts of the United States. Whatever confusion may have resulted from the un- certainty as to the exact holding of the supreme court of the United States in the early case of Bank of Wash- ington V. Triplett,*^ it is certain that all confusion and uncertainty as to the position of that court has been overcome in Exchange National Bank v. Third National Bank.^" Before taking up the issue, the court, in that i^ 3 Barn. & C. 439, 444. *8 Mackersy v. Ramsays, 9 Clark & P. 818, 849-852. See, also, Prideaux v. Crlddle, L. R. 4 Q. B. 455; Cobb v. Becke, 6 Q. B. 930. 48 1 Pet. (XJ. S.) 25. The opinion in this case states that the paper was delivered to the bank for "the purpose of being trans- mitted," and the case has been cited by the adherents of each theory; one side contending that the decision in the case that the initial bank was not liable for the defaults of its correspondent was due solely to the fact that the original contract was merely for "transmission," and not for "collection;" the other side con- tending that the word "transmission" was used in a broader sense, and that there was nothing in the case to show but that the un- dertaking was an ordinary contract for "collection," and hence maintaining that the case was authority for the doctrine that the initial collecting bank is not liable for the defaults of its corre- spondents, but that the latter are the agents of the owner. 50 112 U. S. 276, 5 Sup. Ct. 141. See, also. Hoover v. Wise, 91 U. S. 308; Hyde v. Pirst Nat. Bank of Lacon, 7 Biss. 156, Ped. Cas. No. 6,970. (149) § 87 BANK COLLECTIONS. [Ch. 5 case, makes the following general observations: "The question involves a rule of law of general application. Whatever be the proper rule, it is one of commercial law. It concerns trade between different and distant places, and, in the absence of statutory regulations or special contract or usage having the force of law, it is not to be determined according to the views or in- terests of any particular individuals, classes or locali- ties, but according to those principles which will best promote the general welfare of the commercial com- munity." The court then states its decision of this dis- puted point as follows : "Whether a draft is payable in the place where the bank receiving it for collection is situated, or in another place, the holder is aware that the collection must be made by a competent agent. In either case, there is an implied contract of the bank that the proper measures shall be used to collect the draft, and a right, on the part of its owner, to presume that proper agents will be employed, he having no knowledge of the agents. There is, therefore, no rea- son for liability or exemption from liability in the one case which does not apply to the other. * * * The distinction recurs between the rule of merely personal representative agency and the responsibility imposed by the law of commercial contracts. This solves the difficulty, and reconciles the apparent conflict of de- cision in many cases. The nature of the contract is the test. If the contract be only for the immediate services of the agent, and for his faithful conduct as representing his principal, the responsibility ceases with the limits of the personal services undertaken. But where the contract looks mainly to the thing to (150) (Jh. 5] EMPLOYMENT OF AGENTS, ETC. § 88 be done, and the undertaking is for the due use of all proper means to performance, the responsibility ex- tends to all necessary and proper means to accomplish the object, by whomsoever used." § 88. New York. The leading case in New York is Allen v. Merchants' Bank,5i holding that the initial collecting bank is liable to the owner of paper payable at a distance for the default of a correspondent bank at the place of pay- ment, to Avhich it sent the paper for collection; the specific default being the failure of a notary, employed by the correspondent bank, to give notice of dishonor. The ground of the decision is that the initial bank un- dertakes to "collect" the paper, and that any banks employed by it to assist in the collection are its own agents, and not the agents of the owner of the paper. This decision is severely criticised by the courts hold- ing the opposite view, mainly on the ground that it was rendered by a divided court ; fourteen senators hav- ing concurred in the decision, and ten, including the chancellor, having dissented. But however divided the court may have been on the question at that time, both the supreme court and the court of appeals have since uniformly adopted and applied the rule on reason as well as on the principle of stare decisis.^^ 5122 Wend. (N. Y.) 215, reversing 15 Wend. 482. 52 Montgomery County Bank v. Albany City Bank, 7 N. Y. 459; Commercial Bank of Pennsylvania v. Union Bank of New York, 11 N. Y. 203, affirming 19 Barb. 391, 1 Kern. 203; Naser v. First Nat. Bank, 116 N. Y. 498; Saint Nicholas Bank v. State Nat. Bank, 128 N. Y. 26, 27 N. E. 849; Castle v. Corn Exchange Bank, 148 N. (151) § 88 BANK COLLECTIONS. [Ch. 5 Strictly in harmony Avith this rule, it has also been held in New York that, where the initial bank sends a draft for collection to its correspondent, which, in turn, sends the paper to its correspondent at the place of payment, the two correspondent banks are not jointly liable to the initial bank for failure of the bank at the place of payment to present the paper and give notice of nonpayment; but the latter bank is liable only to its immediate correspondent, which is liable severally to the initial bank.^^ The same rule has been applied in New York to ex- press companies, and it has been held that where a note delivered to an express company for collection at a place beyond its line is turned over by it to another express company, the latter company becomes the agent of the former, and the first company is liable for the negligence of such agent, and for its noncompliance with instructions accompanying the note.^* This hold- ing is based on the theory that a contract to carry, and not a contract to forward, arises where a note is de- Y. 122, 42 N. E. 518; Kirkham v. Bank of America, 26 App. Div. 110, 49 N. Y. Supp. 767, affirmed 'n 165 N. Y. 132, 58 N. E. 753. In an early case (1847) decided by the circuit judge of the then New York circuit, it was held that a bank sending paper, payable at a distance, to a collecting agency at the place of payment, was not liable for its defaults. Escharte v. Clark, 2 Edm. Sel. Gas. (N. Y.) 445. 53 Montgomery County Bank v. Albany City Bank, 7 N. Y. 459, 464, affirming 8 Barb. 396. The objection that defendants are not jointly liable may be taken at the trial. Id. 5* Palmer v. Holland, 51 N. Y. 416, 10 Am. Rep. 616. In this case the owner of the note did not know, at the time the note was delivered to the first company, that its line did not extend to the place where the note was payable. (152) Ch. 5] EMPLOYMENT OF AGENTS, ETC. § 90 livered to an express company with directions to take it to the place of the maker's residence and present it, and to sue and collect it in case of nonpayment.^^ The analogy between this contract to "carry" and a bank's contract to "collect" is apparent. § 89. New Jersey. The Xew Jersey court of errors and appeals, in adopting the English and New York rule that the initial bank is liable for the defaults and mistakes of its chosen correspondents, states that, the rule is no hard- ship on the bank, as it can always look to its corre- spondent bank, to which transmission is made, for in- demnification from its neglect.^" In this case, the court, in cominenting on the contrary position of the Massachusetts court,^'' states: "The decisions in Mas- sachusetts, which our courts are accustomed to respect, are much weakened by the fact that in the first case reliance was had upon the decision of the supreme court of New York in Allen v. Merchants' Bank, which was afterwards reversed in the court of errors,^^ and on the misapprehension that it was the opinion of the supreme court of the United States in Bank of Wash- ington T. Triplett.^^ § 90. Ohio. When the supreme court of Ohio came to the parting 65 Palmer v. Holland, 51 N. Y. 416, 10 Am. Rep. 616. 56 Titus V. Mechanics' Nat. Bank, 35 N. J. Law, 588. ST See post, § 99. ■"■s See ante, § 88. 50 See ante, § 87. (153) § 92 BANK COLLECTIONS. [Ch 5 of the ways, it deliberately chose to follow the path marked out by the English and the New York courts. Its decision is consequently that the correspondent bank is the agent of the transmitting bank, and not a sub- agent of the owner.^" The later decisions in the same state are strictly in harmony with this first decision."^ § 91. Georgia. In the iirst and leading case in Georgia, the supreme court of that state, in adopting the rule that the initial bank is liable for the defaults of its correspondents, bases its decision on the general rules of agency, and states that, "in the selection of the correspondent, the customer for whom the collection is to be made is not consulted. As a rule, he does not know the name or the financial standing of the correspondent, and it is not contemplated that they shall have any communi- cation with each other." ®^ The court in this case also states that the doctrine that the initial bank is re- sponsible for the acts of its subagents is not only in accord with the principles of agency, but with consid- erations affecting the general welfare of the commer- cial community. § 92. Michigan. The supreme court of Michigan has expressed its opinion on this question in no uncertain language. In 60 Reeves v. State Bank, 8 Ohio St. 465. 61 First Nat. Bank of Cincinnati v. Moore (Ohio) 8 Am. Law Rec. 97, 4 Wkly. Law Bui. 291; Young y. Noble's Bx'rs, 2 Disn. (Ohio) 485. 62 Bailie v. Augusta Sav. Bank, 95 Ga. 277, 21 S. B. 717. (154) Ch. 5] EMPLOYMENT OF AGENTS, ETC. § 92 the leading Michigan case the court says : "As long as banks and bankers or other persons hold themselves out to collect such bills or drafts for a compensation, or their advantage, they ought to be governed by the same rules of law that apply to other persons, and if they wish to avoid responsibility, it is very easy for them to accept such business only on a special agreement as to their duties and liabilities. Failing to do this, I think they must, in taking such bills or drafts, be responsible, as other business men are, for the misconduct of their selected agents at home or abroad." ^^ The court thus refuses to recognize any distinction between the duty and liability of the bank in case the paper is payable in the place where it does business or at a distance, and its further reasoning is as follows: "The learned jurists holding otherwise all admit that, if a person intrusts a home draft or bill to a bank for collection, such bank is responsible to the customer for any negligence or default of its agents, officers, or em- ployes. I cannot see why any different rule should prevail in the collection of a foreign bill. It is, in every case that I have examined, sought to be maintained upon the theory that the customer knows the bank must act through some other person or persons at a distance, and therefore impliedly, from the very nature of the course of business, assents to the employment of such persons, and makes them his agents. This reasoning does not strike me as sound. If I leave an indorsed note against persons in my own town for collection, 63 Simpson v. Waldby, 63 Mich. 439, 30 N. W. 199. (155) § 93 BANK COLLECTIONS. [Ch. 5 and consequent demand and protest, I know that some agent or employe of the bank will do the work, or some part of it, and I do not know or inquire who will do it. I contract, however, with the bank that suitable agents will be employed, and hold it responsible for their acts. The law authorizes me to do this. If I intrust the same bank with the collection of a foreign draft, I also know that it will employ some agent or correspondent abroad, of their selection, not mine, ,of whom I know nothing, and with Avhom they are supposed to have business re- lations. I do not inquire whom they are to select. I presume, and have a right to presume, that they have business knowledge of such agent or agents, which I do not and cannot possess, by the very course of their ^ dealings as bankers. In each case the bank holds itself out, for a consideration, to collect my paper, and it can make no difference whether the compensation is great or small. In each case it selects its own agents in the premises. In each case I have no part in or con- trol over such selection. In each case there is no privity between the party selected and myself. I fail to per- ceive why, in the one case more than the other, I adopt the immediate party collecting or protesting the bill as my agent. I cannot find any good reason for making this particular case of the collection of a foreign bill an exception to the general rule of agency."®* § 93. Minnesota. The Minnesota supreme court employs similar rea- soning, and, among other things, says : "The plaintiffs had no voice in the selection of appellant's agent or cor- respondent, and it is difficult to see why banks and bank- 0-1 Simpson v. Waldby, 63 Mich. 451, 30 N. W. 199, 205. (1.56) Ch. 5] EMPLOYMENT OP AGENTS, ETC. § 95 ing houses should be exempt from the application of a cardinal and well-established principle of law that every person is liable for the acts of such agents as may be appointed or designated by him to transact such business as he has undertaken to perform for others. The appellant, having undertaken the collection of the paper, stands in the attitude of an independent con- tractor, who, having unrestrained liberty so to do, has designated a subagent, and is therefore answerable for his neglect, failure, or default."®^ § 94. Montana. The supreme court of Montana, after a very thorough discussion of all the cases, holds that, "in the absence of a special contract, a bank is absolutely liable for any laches, negligence, or default of its correspondent, whereby the holder of negotiable paper suffers loss;" and states that "banks can easily avoid the effects of this stringent rule by making special contracts in spe- cial cases, or declining to undertake collections at points where they have any fears as to the reliability or solvency of the agents whom they will be obliged to employ.""^ § 95. North Dakota. In North Dakota, the relation of the parties is deter- mined in a recent case ( 1899 ) holding that, where notes are indorsed to a bank for collection, and the bank forwards them to a bank in another city for collection, 65 Streissguth v. National German-American Bank, 43 Minn. 50, 44 N. W. 797. 66 Power V. First Nat. Bank of Fort Benton, 6 Mont. 251, 270. (157) § 96 BANK COLLECTIONS. [Ch, 5 the latter bank becomes the agent of the former, as between them, and is also a siibagent of the payees of the notes.'^'^ As to the liability of the parties, the court, after mentioning the conflict of authorities, says: "But in this state the controversy' has been set at rest by section 4133 of the Revised Codes, which is as fol- lows : "A mere agent of an agent is not responsible as such to the principal of the latter.' Applying this rule to the case at bar, the defendant (correspondent bank) is not legally responsible to E. P. R. & Co. [the payees], who own the notes in question, and who are the prin- cipals of the plaintiff. The owners of the notes have no contractual relations with the defendant. They dealt solely with the plaintiff [initial bank], and, un- der the rule of law which obtains in New York and in this state, they are required only to look to the plain- tiff for redress or damages for any acts of negligence to their detriment, done either by the plaintiff or by agents appointed by the plaintiff."®* The court then states that, as a necessary corollary, the initial bank may compel the correspondent bank to respond in dam- ages to it for any negligence of the latter bank for which the former must respond to the owners.^® § 96. South Dakota. South Dakota has fallen into line in a decision that, where a note payable at a bank is sent to that bank for 67 Commercial Bank v. Red River Valley Nat. Bank, 8 N. D. 382, 79 N. W. 859. S8 Commercial Bank v. Red River Valley Nat. Bank, 8 N. D'. 382, 79 N. W. 859. 00 See post, § 120. (158) Ch. 5] E3MPL0YMENT OP AGENTS, ETC. § 9s collection, without special instructions, but indorsed for collection and remittance, the bank has no implied authority to employ another bank in another city to make the collection, and one so employed is the agent of the bank, and not of the owner, so that a payment to the second bank is not a payment to the ownerJ" It will be seen, however, that in this case the note was sent for collection to the bank where it was payable, and that it is this bank which is denied the right to employ a subagent for the owner, or, as the court expresses it, to "delegate its poAvers." ^ 97. Colorado. The question has n,ot yet been squarely presented to the courts of Colorado, but the supreme court of that state, in deciding that a bank primarily liable on the paper is not a suitable subagent for its collection, seems to intimate that if the question had been fairly pre- sented it would have held the transmitting bank liable for the defaults of its chosen correspondent, for it says : "Even if we were to follow the rule that the collecting bank could relieve itself from liability by sending the paper in due season to a suitable agent, with proper instructions, we feel constrained to hold" that the agent must be some one other than the party who is to make payment.^^ § 98. Texas. In the first Texas case passing on the question the 70 Sherman v. Port Huron Engine & Thresher Co., 8 S. D. 343, 66 N. W. 1077. "1 German Nat. Bank of Denver v Burns, 12 Colo. 539, 544. (159) g 99 BANK COLLECTIONS. [Ch. 5 court of civil appeals adopts the theory that the initial bank is liable for the defaults of all its correspondents and agents.''^ Strictly in harmony with this decision is a later one by the same court, that where a note is de- posited in a bank to be collected at a distant point, where such bank has no regular agent or correspondent, and it transmits the note to a bank at such place for collection and remittance, in the absence of special agreement or binding custom, the second bank is the agent of the first, and not of the owner, and that the first is responsible to the owner for the defaults of the secondJ^ § 99. Massachusetts. The first Massachusetts case passing directly on the question is Fabens v. Mercantile Bank,'^* which is usually considered as the leading case for the doctrine that the initial bank is not liable for the defaults of its correspondent, if it used due care in selecting the cor- respondent. The decision is very concise, and states that, "when a note is deposited with a bank for collec- tion, which is payable at another place, the whole duty of the bank so receiving the note in the first instance is seasonably to transmit the same to a suitable bank or other agent at the place of payment. And as a part 72 state Nat. Bank of Ft. Worth v. Thomas Mfg. Co., 17 Tex. Civ. App. 214, 42 S. W. 1016, citing Exchange Nat. Bank of Pitts- burgh V. Third Nat. Bank of New York, 112 U. S. 276, 5 Sup. Ct. Rep. 141. 73 Schumacher v. Trent, 18 Tex. Civ. App. 17, 44 S. W. 460. 74 23 Pick. (Mass.) 330. See criticism of this decision by supreme court of New Jersey, ante, § 89. (160) Ch. 5] EMPLOYMENT OP AGENTS, ETC. § 100 of the same doctrine, it is well settled that, if the ac- ceptor of a bill or promisor of a note has his residence in another place, it shall be presumed to have been in- tended and understood between the depositor for col- lection and the bank that it was to be transmitted to the place of the residence of the promisor, and the same rule shall then apply as if, on the face of the note, it was payable at that place." This rule has been since consistently followed in Massachusetts,^^ and, as we shall see, in many of the other states. § 100. Connecticut. In Connecticut, the question arose in a case where the initial collecting bank had indorsed the bill in blank, and forwarded it for collection to another bank, which also indorsed it in blank for collection to a bank at the place of payment. The money was paid to the last bank, and the owners of the bill sued it for money had and received for their use. Eecovery was allowed on the ground that "all the indorsees were merely agents of the plaintiffs for the collection and transmission of their money." ^® Later, in East Haddam Bank v. Scovil,'^^ the question of liability or nonliability of the initial collecting bank for the defaults of its correspondent was squarely pre- sented, and the court, after stating that the bill was payable in a city other than the city where the initial Ts Dorchester and Milton Bank v. New England Bank, 1 Gush. (Mass.) 177; Warren Bank v. Suffolk Bank, 10 Gush. (Mass.) 582 (default of notary). 78 Lawrence v. Stonington Bank, 6 Gonn. 521, 527. 77 12 Conn. 303, 314. (161) § 101 BANKi COLLECTIONS. [Ch. 5 bank did its business, says: "Under such circum- stances, it cannot justly be claimed that the plaintiffs [initial bank] should have become insurers against the defaults of their correspondents. Such a doctrine would be as inequitable as it might be oppressive and ruinous to banks Avho are merely the medium through which the holders of bills and drafts, payable in other states, transmit them for collection. If they act in good faith in the selection of an agent to protect the interests of the holder of the bill, in cases where it is obvious an agent must be selected for such purpose, what prin- ciple of justice or commercial policy requires that they should be held liable for any neglect of duty on the part of such agent? To impose this liability would make a special contract excluding it necessary in all cases; or it would render the collection of bills of this description extremely difScult." § 101. Pennsylvania. Pennsylvania can hardly be said to sanction the broad rule that the transmitting bank is liable for the acts and defaults of its chosen correspondents. The first case. Mechanics' Bank v. Earp,"^ held the initial bank not liable for the default of its correspondent at the place of payment, because the owner gave specific in- structions as to the manner of presentment at the place of payment at the time of the initial delivery for col- lection, and that, consequently, the contract was merely to "transmit," and not to "collect." 78 4 Rawle (Pa.) 384. See, also, Belleraire v. Bank of United States, 4 Whart. (Pa.) 104. (162) Ch. 5] EMPLOYMENT OF AGENTS, ETC. § 101 Later decisions in Pennsylvania are to the effect that a bank receiving commercial paper for "transmission" only is not liable for the defaults of its correspondent if it exercised due care in the selection of such corre- spondent; otherwise, if it accepted the paper for "col- lection;'"" and that a receipt "for collection" shows an undertaking to collect, and not a mere undertaking to remit for collection to some other person or bank, and hence a collection agency giving such a receipt is liable for the default of its selected agent, to whom it remitted the paper for collection.®" In a still later Pennsylvania case, a collection agency was held liable for the misconduct of an attorney into whose hands it placed the claim ; but it appeared from the receipt given that the claim Avas "to be forwarded by us for collection by suit or otherwise, at our discre- tion," and in the margin of the receipt were the words : "Collections made in all parts of the United States and Canada." 81 It will thus be seen that the supreme court of Penn- sylvania practically requires a special express contract to "collect" as the foundation of any decision that the transmitting bank or agency is liable for defaults of its TO Wingate v. Mechanics' Bank, 10 Pa. St. 104. The court in this case takes pains to show the conformity of its decision to that in Mechanics' Bank v. Earp, 4 Rawle (Pa.) 384. «o Bradstreet v. Bverson, 72 Pa. St. 124,, 13 Am. Rep. 665. SI Morgan v. Tener, 83 Pa. St. 305. In the case of Siner v. Stearne, 155 Pa. St. 62, the same court, following Bradstreet v. Everson, 72 Pa. St. 124, 13 Am. Rep. 665, and Morgan v. Tener, 83 Pa. St. 305, holds that a collecting agency which undertook the actual "collection" of the claim was re- sponsible for the negligence of an attorney employed by it. (163) § 103 BANK COLLECTIONS. [Ch. 5 correspondent, and holds, in effect, that, in the absence of such special contract, the only duty of the initial bank is to transmit to a suitable correspondent. This interpretation of the Pennsylvania cases is expressly recognizefl by a statement in the case of Merchants' National Bank v. Goodman,*^ to the effect that: "In our state, the principle has, in several instances, been maintained that a collecting bank is an agent for trans- mission to a subagent to collect, and when this is prop- erly done, its duty is performed, and its responsibility is at an end," and by dicta in the same case to the same effect. § 102. Maryland. The supreme court of Maryland refuses to sanction the doctrine that, in the absence of a special agreement or of special instructions, a bank receiving paper for collection thereby undertakes to do all that is proper and necessary to effect the collection, but adopts the doctrine that, if it selects a suitable subagent, it per- forms its whole undertaking.®^ § 103. North Carolina. The supreme court of North Carolina follows the opinions and the wording of the Massachusetts deci- sions, and consequently holds that a subagent must 82 109 Pa. St. 422, 427. 83 Citizens' Bank of Baltimore v. Howell, 8 Md. 530. The exact point in the case was, however, as to the liability of the bank for the default of a notary. See, also, Jackson v. Union Bank, 6 Har. & J. (Md.) 146, where nonliability of the initial bank was based on proof of local custom. (164) Ch. 5] EMPLOYMENT OF AGENTS, ETC. § lu4 necessarily be employed from the very nature of the undertaking, and that the assent of the owner of the paper must necessarily be implied, and hence, if the initial bank uses due care in the selection of a corre- spondent, it is not liable for its defaults.^* § 104. Indiana. The Indiana cases have been usually cited as holding the initial bank liable for the defaults of its corre- spondents, but they will not bear such an interpreta- tion. The case of Tyson v. State Bank of Indiana*^ was an action against a bank for the negligence of one of its branches, and consequently the negligence of the bank itself, for a failure to present a bill either for accept- ance or payment, whereby all remedy on the bill was lost. The opinion proceeds entirely on the theory that there is only one bank in the case, and the decision is that the bank, "having undertaken, for a reasonable reward, to collect the plaintiff's debt, placed itself in the position of an agent or attorney, who, for reward, undertakes to perform services for another in the line of his business or profession. He is bound to a faith- ful discharge of his duty, and is responsible to his em- ployer for all damages arising from his neglect." The case of American Express Go. v. Haire,*® the 84 Planters' & Farmers' Nat. Bank of Baltimore v. First Nat. Bank of Wilmington, 75 N. C. 534. 85 6 Blackf. (Ind.) 225. 86 21 Ind. 4. For liability of collecting attorney in Indiana, see Abbott v. Smith, 4 Ind. 452. (165) R 105 BANK COLLECTIONS. [Oh 5 other Indiana case supposed to hold that the initial collecting bank is liable for the defaults of its corre- spondents or other agents, is not at all in point. In the first place, the collecting medium was an express company, and not a bank, and, in the second place, the exact holding was that the express company was liable to the owner for its OAvn negligence in not delivering the bill to a notary at the proper time, i. e., in deliver- ing it to the notary for demand and protest one day before demand and protest could be properly made, thereby misleading the notary into taking such steps prematurely, and discharging the drawer and the in- dorsers. The first and leading Indiana case which passes di- rectly on the question is Irwin v. Reeves Pulley Com- pany,*^ and the court there adopts the doctrine that the initial bank is not liable for the defaults of its correspondent, and discharges its full duty if it exer- cises reasonable skill and care in the selection of its correspondent ; on the theory, adopted generally in this class of decisions, that the owner impliedly consents to the employment of subagents to make the collec- tion at the place of payment. § 105. Illinois. The courts of Illinois have consistently held, from the time when the first case involving the point came up for decision, that where paper payable at a distance or drawn on nonresidents is deposited for collection 87 20 Ind. App. 101, 48 N. E. 601, 603, 50 N. E. 317, distinguishing Tyson v. State Bank, 6 Blackf. (Ind.) 225, and American Express Co. V. Hairs, 21 Ind. 4. (166) Ch. 5] EMPLOYMENT OF AGENTS, ETC. § 107 with a local bank, such bank fully discharges its duty by transmitting the paper in due season to a suitable bank or agent at the place of payment, with proper instructions, and is not liable for loss occasioned by negligence or default of the agent so employed ; on the ground that, by depositing paper so payable, the owner impliedly consents to the employment of a subagent at the place of payment, and hence the latter is the agent of the owner, and not 'of the transmitting bank.*^ § 106. Wisconsin. In Wisconsin, a case arose where, in view of the fact that there was no bank at the place of payment, the transmitting bank sent the paper to an express com- pany at such place. The court held that "the con- tract implied by the reception of the note against a party residing at a distance from its place of business" was not absolutely to make due presentment and give due notice, but to place the note in the hands of some competent and responsible agent doing" business at the residence of the maker, and that, having done this, it is itself discharged from liability."®^ § 107. Iowa. In Iowa, the question was settled in the case of Gue- ss Waterloo Milling Co. v. Kuenster, 158 111. 259, 41 N. E. 906, 29 L. R. A. 794, affirming 58 111. App. 61; Drovers' Nat. Bank v. Anglo-American Packing & Provision Co., 117 111. 100, affirming 18 111. App. 191; Pay v. Strawn, 32 111. 295; Aetna Ins. Co. v. Alton City Bank, 25 111. 243, 247, 79 Am. Dec. 328; Anderson v. Alton Nat. Bank, 59 111. App. 587, 591; Carlinville Nat. Bank v. Wilson, 78 111. App. 339, affirmed in 58 N. B. 250. 89 Stacy V. Dane County Bank, 12 Wis. 629, 634. (167) § 108 BANK COLLECTIONS. [Ch. 5 iich V. National State Bank,^" where the court said, as to the liability of collecting banks for the defaults of correspondents : "They do not undertake themselves to collect the bills, but to intrust them to other banks at the place payment is to be made. The holder of the paper, having full notice of the course of business, must be held to assent thereto. He therefore authorizes the bank with whom he deals to do the work of collection through another bank." § 108. Kansas. The position of the Kansas courts is parallel to that of the Pennsylvania courts. On the strength of an , erroneous interpretation of the case of Bank of Lins- borg V. Ober,"^ Kansas has heretofore been enumerated as one of the states in which it is held broadly that the initial collecting bank is not liable for the defaults of its selected correspondent. But, though its tend- ency is in that direction, an examination of that case will show that the question of the liability of the initial bank was not before the court, for the opinion states: "Whether the First National Bank of Selina [the ini- tial bank] or John McPhail [an incompetent notary employed by the correspondent bank] is liable or not are questions not necessary to be determined in this case, as the case is now presented to this court. The only question necessary to be determined by this court is whether the Bank of Linsborg [correspondent bank] is liable or not." The court then expressly bases its 90 56 Iowa, 434, 9 N. W. 328, distinguishing Hoover v. Wise, 91 U. S. 308. 0131 Kan. 599, 3 Pac. 324. (168) ■Ch. S] EMPLOYMENT OP AGENTS, ETC. § 109 decision that such correspondent is liable directly to the owner of the paper on a specific finding of the court below, and its own finding that the note was de- livered to the initial bank "with the understanding that the note would be forwarded by such bank to the Bank of Linsborg for collection." Such findings, however, were based on evidence of general custom, and of a special course of dealing between the owner and the banks involved. A recent case decided by the Kansas court of ap- peals places this interpretation on the case just con- sidered, and itself holds that a bank actually under- taking to "collect" paper assumes the same liability as an attorney at law does under the same circum- stances; and undertakes to actually "collect," and not merely to remit for collection to another responsible bank.^2 This decision, the court states, is in harmony with that of Bank of Linsborg v. Ober, for each holds that "the agent of the owner is liable to the owner for acts of subagents selected by the said agent upon his own responsibility." § 109. Nebraska. The rule in Nebraska is that, where a bank receives for collection a note or bill payable at a distant point, with the understanding that such collection is an ac- commodation only, or that it shall receive no compensa- tion therefor beyond the customary exchange, and it transmits such paper to a reputable and suitable cor- respondent at the place of payment, with proper in- s2 First Nat. Bank of Girard v. Craig, 3 Kan. App. 166, 42 Pao. 830. (169) § 111 BANK COLLECTIONS. [Ch. 5 structions for the collection and remittance of the pro- ceeds, it will not be liable for the defaults of its cor- respondent.^^ In such case, the holder will be held to have assented to the employment in his behalf of such agents as are usually selected by banks in the course of business in making collections through correspond- ents, and the correspondent so selected will, in the ab- sence of negligence by the intermediate agents and servants of the transmitting bank, become the agent of the holder only.^* § 110. Missouri. In the first Missouri case directly involving the point in issue, the court decides to follow what it considers the weight of the authorities, and holds that, "where the bank with which the bill or draft is placed or deposited for collection uses due diligence and transmits the pa- per to a proper correspondent for collection, with prop- er instructions for the collection of the same, its re- sponsibility is at an end, unless by some after act it makes itself responsible.""^ i 111. Kentucky. The court of appeals of Kentucky also adopts the doc- trine that, where paper payable at a distance is depos- es First Nat. Bank of Pawnee City v. Sprague, 34 Neb. 318, 51 N.^ W. 846. 84 First Nat. Bank of Pawnee City v. Sprague, 34 Neb. 318, 51 N. W. 846. 95 Daly V. Butchers' & Drovers' Bank of St. Louis, 56 Mo. 94. To same effect is American Exchange Nat. Bank of Lincoln v.. Metropolitan Nat. Bank of Kansas City, 71 Mo. App. 451. (170) Ch. 5] EMPLOYMENT OP AGENTS, ETC. | 112 ited in a bank for collection, the owner "must know the bank cannot send one of its officers or agents to such point to make the collection. He is presumed to know the method employed by banks in maldng such collec- tions. He knows that tlie bank must select some other bank or agency to aid in accomplishing the undertak- ing imposed on it. He has made the bank his agent for that purpose. He has employed the bank to do, through its method of making collection, that which would cost him much time and money to do himself. When he so engages the bank, and makes it his agent to make the collection, he does so with the implied understanding that the bank will follow the customary method in making such collections, which necessitates the selection of agents or correspondents at other points to carry out the undertaking, and the bank can only be held responsible for the exercise of due care and diligence in making such selection.''^'' § 112. Tennessee. The supreme court of Tennessee, in the first case that arose in that state involving this question, reviewed briefly the conflicting authorities, and adopted, as the more just and equitable rule, the doctrine that a bank receiving for collection paper payable at a distance per- forms its full duty by transmitting the paper in due season to a suitable and reputable bank or other agent at the place of payment, and that in such case it is manifest that a subagent must be employed, and there- fore the owner impliedly consents to the employment 98 Farmers' Bank & Trust Co. v. Newland, 97 Ky. 464, 31 S. W. 38. (lYl) § 113 BANK COLLECTIONS. [Oh. S of such subagent.^'^ The same court again affirms the same doctrine in Banlc v. Cummings,^* where tlae court reiterates that the correspondent or agent at the place of payment is the agent of the owner of the paper, and not of tlie transmitting banlt, and tliat the liability of the latter is limited to its own negligence. The same doctrine is again announced and prior cases followed in the recent case of Givan v. Bank of Alex- andria.^^ In view of this uniformity of decision, there can be no doubt as to the position of the courts of Ten- nessee on this disputed question. § 113. Alabama. The question whether one delivering paper to a bank for collection at a remote place impliedly authorizes the bank to appoint a subagent at that place has not yet been judicially determined in Alabama; but the su- preme court of that state has decided that, even if it be admitted that such is the rule in that state, the rule does not apply where a draft sent by the initial bank to a bank at the place of payment was payable "on ar- rival of car" of merchandise, to the order of the cashier of the initial bank, and was indorsed by it for collec- tion on its own account, and the sale of the merchan- dise was rescinded for good cause by the drawee of the draft (the purchaser of the goods) after he had paid the amount of the draft to the correspondent bank, and before remittance of the amount to the initial bank; 07 Bank of Louisville v. First Nat. Bank of Knoxville, 8 Baxt. (Tenn.) 101, 35 Am. Rep. 691. 98 89 Tenn. 609, 618. 08 (Tenn. Ch., 1898) 52 S. W. 923. (172) Oh. 5] EMPLOYMENT OF AGENTS, ETC. §115 since, in such case, the rescission related back to the time of the sale, and by relation "the plaintiff [drawee] was deemed owner of the money at the moment it was paid. It was paid in mistake of fact, and its receipt was possessed of the same attributes as the receipt of money equitably belonging to the plaintiff under any other circumstances."^"" § 114. Mississippi. The supreme court of Mississippi, in Third National Bank v. Yicksburg Bank,^°^ determines that its prior decisions as to the liability of a collecting bank for the default of a notary ^°^ control, and that, consequently, a bank receiving paper for collection is not liable for the defaults of correspondent banks, if it has used due care in their selection. To this decision, however. Chief Justice Campbell dissents strongly, both on principle, and because he considers that the prior Mississippi cases are not authority on the point in issue. § 115. Louisiana. The supreme court of Louisiana adopts the rule that the power to appoint a subagent "is implied whenever the principal knows that the mandatary will necessarily be obliged to act by a substitute. The plaintiffs knew that the bank could not go personally to Natchez [place of payment], nor send its cashier there, because his ab- sence would have been extremely inconvenient to them, 100 Eufaula Grocery Co. v. Missouri Nat. Bank, 118 Ala. 408, 24 So. 389. 101 61 Miss. 112. 102 See ante, § 81. (173) § 116 BANK COLLECTIONS. | Ch. 5 and his traveling expenses burthensome to plaintiffs; so that they could not expect that the defendants would resort to any other than the ordinary mode of collec- tion, to wit, the agency of a bank at the place of pay- ment."^"^ The court also states that it was not the duty of the bank to decline the handling of the paper, nor to notify plaintiffs that they forwarded it to a bank at the place of payment at plaintiffs' risk. But the same court holds the collecting bank liable for failure to select a "prudent and reliable subagent," and so holds a bank receiving lottery tickets as pledgee and for col- lection liable for overcharges made by its correspondent by way of commissions for collecting.^"* § 116. Conclusions from the decisions. As pointed, out in discussing the analogous question of the liability of the bank for the acts or defaults of a notarj^ employed by it, the conflict of authorities arises primarily from a difference of opinion as to the exact relation between the collecting bank and its customer. The bailment theory of the relation, applied there as well as elsewhere in this work, when applied her^ makes the bank liable for the acts or defaults of its selected correspondents. It is believed, also, that a proper ap- plication of the doctrines of agency results in holding tlie bank liable for such acts and defaults. It is only by a careful avoidance of the rules of agency forbidding the delegation of power in respect to an undertaking 103 Hum V. Union Bank, 4 Rob. (La.) 109. 104 Maslch V. Citizens' Bank, 34 La. Ann. 1207. See, also, ante, § 77. (174) Ch. S] EMPLOYMENT OP AGENTS, ETC. § Hg involving confidential services/"'^ and the rules making hn agent personallj' liable for the acts of any subagents appointed by him,'"" and by the unwarranted injec- tion into the relation of an implied agreement on the part of the depositor in the case of paper payable at a distance, that the bank niaj^ employ entire strangers to him, whose acts be cannot control, as his agents, and by the adoption of the legal quibble that a bank receiv- ing paper for collection does not really undertake to ^'collect," but merely undertakes to find some other suit- able person or bank to do the collecting, that the theory of the nonliability of the initial collecting bank for the defaults of its correspondents has been evolved. It is difficult to see why, if the agency theory is adopted, the collecting bank should be made an exception to some of the cardinal rules of agency. Some of the courts holding the nonliability theory seem to be influenced by the smallness of the considera- tion received by the initial bank; but this is a matter which is certainly within its power to remedy. Each side claims that its position is supported by considerations affecting the stability of banking and general commercial business, and the general welfare of the business world; but it is believed that a policy 105 Mechem, Agency, § 185. But see the same work, section 195, subd. 3, where the author intimates that a collecting bank may toe authorized by custom and usage to appoint a subagent for the owner in case of paper payable at a distance, and thus delegate its power to collect. Story, Agency (9th Ed.) §§ 14-16, 29, 34, 108. The same author, in section 514, treats the question of the liability of the collecting bank, but merely gives the conflicting authorities, and does not decide which is the better rule. 1"'! Mechem, Agency, § 197; Story, Agency (9th Ed.) §§ 217a, 231a. (175) § 116 BANK COLLECTIONS. [Ch. 5 which holds the initial collecting bank to a strict ac- countability can in no way prejudice any of such inter- ests. Such a policy is certainly in keeping with a care- ful administration of the business of banks, who hold themselves out to the public as mediums for the speedy and safe collection of paper payable in any part of the country. Mr. Daniel, in his work on Negotiable Instruments, takes the view that the initial bank is liable for any laches or negligence whereby the holder of the paper suffers loss, stating that "any other rule opens the door to carelessness in the conduct of banking business, which should be conducted with every safeguard to the customer who intrusts his interests to the keeping of such agents. If they are averse to dealing with distant and unknown parties, they should decline undertaking the collection or handling of the paper, and, if they as- sume it, they should do so for a sufficient compensation, and be held responsible."^"'^ Then, too, the remedy over against the correspondent bank, which the law allows to the initial bank,^"* affords the latter bank ample protection in most cases, and takes away all appearance of harshness from the rule holding the initial bank liable. As the result, therefore, of an impartial considera- tion of all the authorities and the reasoning on which they are based, we have no hesitation in adopting the rule holding the initial bank liable for the defaults of 107 Daniel, Neg. Inst. (3d Ed.) § 342. Mr. Morse, in his -work on Banks and Banking (3d Ed. §§ 275, 276) takes the opposite view. 108 See post, § 120. (176) Ch. 5] EMPLOYMENT OF AGENTS, ETC. §118 its selected correspondents, as the one more in harmony with the strict legal relation of the parties, and with the interests of the business world. § 117. Effect of special agreements. Any special express agreement forming part of the original contract for collection, and negativing any lia- bility for the defaults of correspondents, will control the rights and liabilities of the parties as to that mat- ^gj,_io9 jjj fact, we have seen that this is the ruling prin- ciple in the Pennsylvania and Kansas cases considered' above, and is pretty generally recognized in all the cases bearing on the matter. That there is an implied agree- ment negativing such liability where the initial bank uses diligence in selecting a correspondent is, as we have seen, the peculiar doctrine of those cases only which deny liability where such diligence has been used. § 118. Effect of custom. In some jurisdictions, it has been held that the doc- trine that a bank undertaking the collection of paper payable in another place is liable for the defaults of its selected agents or correspondents may be modified or negatived by proof of a custom and usage to the con- trary.^i" But in order that proof of custom among 109 Allen V. Merchants' Bank, 22 Wend. (N. Y.) 215, 236; Power V. First Nat. Bank of Fort Benton, 6 Mont. 251; Exchange Nat. of Pittshurgh v. Third Nat. Bank of New York, 112 TJ. S. 276; Simpson v. Waldby, 63 Mich. 451, 30 N. W. 199, 205. 110 Allen V. Merchants' Bank of New York, 22 Wend. (N. Y.) 215, 236; Schumacher v. Trent, 18 Tex. Civ. App. 17, 44 S. W. 460. See, also, Jackson v. Union Bank, 6 Har. & J. (Md.) 146; Bank of (177) § 119 BANK COLLECTIONS. [Ch. 5 bankers may overthrow tlie general rule, the proof must show a usage so uniform and general as to raise a pre- sumption that it was known to all persons dealing with banks.^" Such a custom cannot be proved by the mere opinions of merchants.^ ^^ As to express companies, it has been held that where it was the custom of the receiving company to deliver demands for collection at places beyond its line to a connecting express company, with which it had no gen- eral business arrangements or agreements except that, in case of collections, the connecting company reported to the general agent of the receiving company, and fol- lowed his directions, such custom is evidence of an agreement by the receiving company to treat a note re- ceived for collection according to its established cus- tom, though it does not, as a matter of law, impose on the receiving company any obligation with regard to the collection of the note after its delivery to the connecting company'.^ ^^ § 119. Effect of insolvency of correspondent. In those cases which assert the liability of the initial bank for the defaults of its correspondent, the insol- vency of the correspondent bank after having made the collection does not relieve the initial bank from liabil- Linsborg v. Ober, 31 Kan. 599, 3 Pac. 324; Fabens v. Mercantile Bank, 23 Pick. (Mass.) 330. 111 Schumacher v. Trent, 18 Tex. Civ. App. 17, 44 S. W. 460. 112 Allen V. Merchants' Bank of New York, 22 Wend. (N. Y.) 215. ii3Knapp V. Umted States & Canada Exp. Co., 55 N. H. 348. (178) Ch. 5] EMPLOYMENT OF AGENTS, ETC. S 120 ity.^^* Indeed, in many of those cases the insolvency of the correspondent was the default complained of.^^^ § 120. Liability of correspondent bank to initial bank. It is a necessary corollary to the rule holding the ini- tial bank liable for the default of its correspondent that it have a remedy over against such correspondent."^ The correspondent bank is therefore liable to the trans- mitting bank for the negligence of an agent of the cor- respondent bank, in failing to properly charge the draw- er and indorsers.^^'^ It is also liable to the initial bank for failing to notify it of important facts affecting the collection, from want of which knowledge the initial bank paid the paper, and sustained loss.^^^ 1" Saint Nicholas Bank v. State Nat. Bank, 128 N. Y. 26; Reeves V. State Bank, 8 Ohio St. 465; Simpson v. Waldby, 63 Mich. 439, 30 N. W. 199; Williamsport Gas. Go. v. Pinkerton, 95 Pa. St. 62; First Nat. Bank of Omaha v. First Nat. Bank of Moline, 55 Neb. 303, 75 N. W. 843, citing Story, Agency (9th Ed.) p. 274, § 231a, and Taber v. Perrot, 2 Gall. 565, Fed. Cas. No. 13,721. 115 See cases cited in notes 49 to 73, supra. 116 Commercial Bank v. Red River Valley Nat. Bank, 8 N. D. 382, 79 N. W. 859; Commercial Bank of Pennsylvania v. Union Bank of New York, 11 N. Y. 203, affirming 19 Barb. 391; Ayrault v. Pacific Bank, 47 N. Y. 570; Montgomery County Bank v. Albany City Bank, 7 N. Y. 459; Mound City Paint & Color Co. v. Com- mercial Nat. Bank, 4 Utah, 353, 9 Pac. 709; Simpson v. Waldby, 63 Mich. 439, 30 N. W. 199; Streissguth v. National German- Ameri- can Bank, 43 Minn. 50, 44 N. W. 797; Exchange Nat. Bank of Pittsburgh v. Third Nat. Bank of New York, 112 U. S. 276, 5 Sup. Ct. 141; Titus v. Mechanics' Nat. Bank, 35 N. J. Law, 588. 117 Commercial Bank of Pennsylvania v. Union Bank of New York, 11 N. Y. 203, affirming 19 Barb. 391; Commercial Bank v. Red River Valley Nat. Bank, 8 N. D. 382, 79 N. W. 859. lis Merchants' & Manufacturers' Bank v. Stafford Nat. Bank, 44 Conn. 564, Fed. Cas. No. 9,438. (179) § 120 BANK COLLECTIONS. [(Jh. 5 The initial collecting bank may recover from its cor- respondent the amount of paper sent for collection with explicit instructions to protect and return it if not paid at maturity, where the cashier of the defendant bank by fraud and collusion with the obligor on the paper had allowed it to accumulate, unpaid, without protest or notice, and without entering the items on the books of the bank, or informing the directors of its posses- sion; the initial bank having had no knowledge of the facts constituting the fraud, and having paid to other banks the amount of the paper.^^^ The negligence of the correspondent, and its conse- quent liability to the initial bank, may be waived or re- leased by acts which would discharge the initial bank from liability. But where the drawee was insolvent, and the drawer, after receiving notice of dishonor from the initial collecting bank, paid the amount of the draft to that bank in ignorance of the fact that a correspond- ent bank had been guilty of negligence in failing to col- lect the draft, such payment, having been made under a mistake entitling the drawer to a return of the money, in no wise discharged or suspended the liability of the correspondent bank to the initial bank," and the latter bank may recover from the former for the use of the drawer, though the draft had not been returned to the defendant.^^" 110 National Pahquioque Bank v. First Nat. Bank of Bethel, 36 Conn. 325. 120 Merchants' Bank of Baltimore v. Bank of Commerce, 24 Md. 12, 52, citing Merryman v. State, 5 Har. & J. (Md.) 423, and Whit- ing V. Independent Mutual Ins. Co., 15 Md. 298. (180) Ch. 6] COLLECTION AND REMITTANCE. CHAPTER VI. COMPLETION OP COLLECTION AND REMITTANCE OP PROCEEDS. § 121. Collection complete on receipt of money and entry of ab- solute credit— Change of bank's status from bailee to debtor. 122. Collection not complete on mere credit in advance of col- lection. 123. Exceptions from estoppel or particular course of deal- ing. 124. Completion of collection by application of deposits to payment — Effect of failure to so apply deposits. 125. Withdrawal of deposit. 126. Effect of payment to correspondent bank. 127. How remittance made — Check, draft, or certificate of col- lecting bank. 128. Payment by mistake, and recovery of payments made by mistake. 129. Mistake as to solvency of obligor, or sufficiency of customer's deposits. 130. Voluntary payment by bank cannot be recovered back. The collection is complete on receipt of the money and the entry of absolute credit therefor. It is not complete, however, on a mere credit in advance of actual collection; for such a credit may be canceled on nonpayment of the paper. The entry of a credit on receipt of a draft or check in payment, instead of money, does not amount to a collection until the check or draft is itself paid. Exceptions to the above rules may arise from an estoppel of the bank by acts inconsistent with them, or from a particu- lar course of dealing. The collection may also become complete if the bank, under (181) § 121 BANK COLLECTIONS. [Ch. 6 definite instructions to that effect, applies and appropriates the deposits of the obligor to payment of the paper. In those jurisdictions where the correspondent bank is held to be an agent of the initial bank only, a payment to the cor- respondent is a payment to the initial bank, which is there- after chargeable for the amount as for a completed collec- tion. The bank need not remit the actual money collected unless so expressly instructed. The custom of remitting by check or draft is so universal that the courts take judicial notice of it. But the collection is not complete in such case until the paper sent in payment is itself paid. Where a payment has been made by mistake, it may be re- covered back if the owner will lose none of his rights thereby. But a mistake as to the solvency of the obligor, or the suffi- ciency of a customer's account, is not such a mistake as will authorize a recovery of payments made. A voluntary payment by the collecting bank cannot be re- recovered. § 121. Collection complete on receipt of money and entry of absolute credit — Change of bank's status from bailee to debtor. We have seen that the title to paper deposited for collection in the ordinary course of business remains in the depositor.^ This is because the bank is a mere bailee, or, as some authorities designate it, an agent, for the depositor. But when the paper has been converted into cash, and this cash has been placed at the absolute disposal of the depositor, though still in the possession of the bank, a new relation arises. The rule governing this new state of affairs is that the relation of bailor and bailee, or of principal and iSee ante, §§ 11-19. (183) Ch. 6] COLLECTION AND REMITTANCE. § 121 agent, ceases, and that of creditor and debtor begins, when the money is collected and placed in the general fund of the bank, and absolute credit given therefor.^ But the relation of debtor and creditor does not arise until after the collection has been actually made, and the bank is in actual possession of the proceeds'.^ In some cases, as we shall see later,* the bank is held to the liabilities of a trustee from the mere facts of collec- tion and credit, but the better authorities are nearly uni- form in denying the right to charge the bank with any 2 In re Bank of Madison, 5 Biss. 515, Fed. Cas. No. 890; Bank of Commerce V. Russell, 2 Dill. 215, Fed. Cas. No. 884; Balbach v. Frelinghuysen, 15 Fed. 675; First Nat. Bank of Richmond v. Wil- mington & W. R. Co., 23 C. C. A. 200, 77 Fed. 401; Armstrong v. Commercial Bank of Pennsylvania, 148 TJ. S. 50, 13 Sup. Ct. 533; Beal V. National Exchange Bank of Dallas, 55 Fed. 894, affirming 50 Fed. 355; Marine Bank v. Fulton Bank, 2 Wall. (U. S.) 252, 17 L. Ed. 785; First Nat. Bank of Richmond v. Davis, 114 N. C. 343, 19 S. B. 280; Commercial & Farmers' Nat. Bank of Baltimore V. Davis, 115 N. C. 226, 20 S. E. 370; National Bank of Commerce of Seattle v. Johnson, 6 N. D. 180, 69 N. W. 49; Freeman's Nat. ■Bank v. National Tube- Works Co., 151 Mass. 413, 24 N. E. 779; Manufacturers' Nat. Bank v. Continental Bank, 148 Mass. 553, 20 N. E. 193; Pacific Bank v. Mitchell, 9 Mete. (Mass.) 297; Hallam V. Tillinghast, 19 Wash. 20, 52 Pac. 329; Union Nat. Bank v. Citi- zens' Bank of Union City, 153 Ind. 44, 54 N. B. 97; Gordon v. Rasines, 5 Misc. Rep. 192, 25 N. Y. Supp. 767. The bank may become estopped to deny receipt of the money by wrongfully returning a draft given in payment by the drawee bank. Gregg v. Bi-Metallic Bank, 14 Colo. App. 251, 59 Pac. 852. 3 Beal V. City of Somerville, 5 U. S. App. 14, 50 Fed. 649: BvansviUe Bank v. German-American Bank, 155 U. S. 556, 562, citing Sweeny V. Easter, 1 Wall. (U. S.) 166; White v. National Bank, 102 U. S. 658; Commercial Bank of Pennsylvania v. Arp-stTO-i". iiH tj. S 50; Beal V. National Exchange Bank of Dallas, 55 Fed. 894, affirming 50 Fed. 355. * See post, § 146 et seq. (183) § 122 BANK COLLECTIONS. [Oh. 6 greater responsibility in such case than that of a sim- ple debtor, even though the bank became insolvent be- fore actual remittance.^ § 122. Collection not complete on mere credit in advance of • collection. W& have also, seen that the mere entry of a credit on receipt of the paper is conditional upon ultimate pay- ment, and may be canceled and the. amount charged back in case of nonpayment.* It follows that a mere credit of the amount of the paper, in advance of collec- tion, cannot operate to change the relation of bailor and bailee, or principal and agent, to that of creditor and debtor; in other words, such a credit is not equivalent to collection or payment.'' So, the mere crediting by 5 See post, § 146 et seq. See ante, § 15. 7 Thompson v. Gloucester City Savings Inst. (N. J. Ch.) 8 Atl. 97; Boykln v. Bank of Payetteville, 118 N. C. 566, 24 S. B. 357; National Bank of Commerce v. Manufacturers' & Traders' Bank, 122 N. Y. 367, 25 N. B. 355; National Park Bank v. Seaboard Bank, 114 N. Y. 28, 34, 20 N. E. 632, 11 Am. St. Rep. 612; National Bank of Commerce of Seattle v. Johnson, 6 N. D. 180, .69 N. W. 49; Armstrong v. National Bank of Boyertown, 90 Ky. 431, 437; Levi V. National Bank of Missouri, 5 Kill. 104, Fed. Cas. No. 8,289; Marine Bank v. Pulton Bank, 2 Wall. (U. S.) 252. But a bank can make itself liable to the owner as debtor for the amount of a note deposited with it for collection, by giving credit to the depositor on his bank book, and suing, in its own name, the maker and his surety, having thus assumed property in the note. WetherlU v. Bank of Pennsylvania, 1 Miles (Pa.) 399. The crediting in this case was made, by mistake, and was after- wards erased and canceled by the bank, but the owner, before suit by the bank on the note, had notified it that he would hold it responsible for the amount of the note. (184) Ch. 6] COLLECTION AND REMITTANCE. | 132 a collecting bank of the amount of a bill, at maturity, to the account of the holder, is not such a payment as will discharge an accommodation acceptor thereon ; but the bank succeeds to the rights of the holder, and may recover against the acceptor.^ Paper taken in payment cannot take the place of •cash, under the above rules, and, where a bank, holding notes for collection, accepted other notes of the maker payable to the bank, and credited the payee's account therewith, and surrendered the old notes, but no cash passed, and the account of the maker of the notes was not charged with their amount as money borrowed, there was no payment of the collection, and the owner of the ■surrendered notes may recover against the maker there- •of.« As the authority of the collecting bank to credit the owner with the proceeds is revoked by its failure and suspension, a credit entered after insolvency by an as- signee or receiver cannot avail to change the relation of the parties to that of debtor and creditor. i" For the same reason a transfer of a credit, from the drawer to the payee, of the amount of a check, made by the as- signees of the bank, in advance of collection, is not a payment of the check." 8 Pacific Bank v. Mitchell, 9 Mete. (Mass.) 297, 302. Scott V. Gilkey, 153 111. 168, 39 N. B. 265. Authority of bank to receive paper in payment, see ante, §§ 46-49. 10 First Nat. Bank of Circleville v. Bank of Monroe, 33 Fed. 408; First Nat. Bank of Crown Point v. First Nat. Bank of Richmond, 76 Ind. 561, 40 Am. Rep. 261. See, also, Jockusch v. Towsey, 51 Tex. 129, and ante, § 32. 11 Exchange Bank of Wheeling v. Sutton Bank, 78 Md. 577, 28 A.tl. 563, 23 L. R. A. 173. (185) § 123 BANK COLLECTIONS. ^Ch. 6 It has also been held that where a bank, having cheeks drawn on a banking partnership, sent them to the firm for collection, but the firm was dissolved by the death of a partner before the checks were received, the surviving partner has no authority to charge the checks to the drawers, and credit the amount to the bank on the firm's books.^^ Nor can the bank so change the relation of the parties by giving a credit in advance of collection, on the day of its failure, and while it is, as it were, /u articulo mortis; ^^ especially if such credit is entered before ma- turity of the paper.i* § 123. Exceptions from estoppel or particular course of dealing. The bank may, however, become estopped by its own remissness to deny that it became a debtor for the amount, though it did not receive it in cash. Thus, a collecting bank which received from its correspondent, in payment, a check on a local bank, and gave credit to its customer therefor, and failed to cancel or revoke- such credit for twenty-one days after knowledge of the dishonor of the check, is precluded from denying that it became a debtor to the customer for the amount ; the court stating that the action of the defendant "was con- 12 First Nat. Bank of Alexandria v. Payne & Co.'s Assignees, 8&- Va. 890, 9 S. E. 153. The bank in such case can reclaim the money in full from the assignee for creditors of the firm. Id. 13 Levi V. National Bank of Missouri, 5 Dill. 104, Fed. Cas. No. 8,289. "Jones V. Kilbreth, 49 Ohio St. 401, 31 N. E. 346; Levi v. Na- tional Bank of Missouri, 5 Dill. 104, Fed. Cas. No. 8,289; In re Armstrong, 33 Fed. 405; Gordon v. Rasines, 5 Misc. Rep. 192, 25- N. Y. Supp. 767. (186) Ch. 6] COLLECTION AND REMITTANCE. § 123 elusive evidence of an intention to change its status from that of a mere collecting agent to that of a debt- or." ^^ So, also, where a credit given the initial bank by its correspondent is canceled because of mistake in supposing the collection to have been made, and the amount is charged back to such bank, which notifies its correspondent that the latter will be held responsi- ble, and continues for over two years uncanceled, a cred- it given to the owner, during which time the accounts between the banks were several times rendered and set- tled, there was an "account stated," precluding the ini- tial bank from denying its liability to the owner.^'' The bank maj also become estopped to deny that it is a debtor for the amount, though it never received the money, by wrongfully returning to the drawee bank a draft sent in payment of a check, pursuant to a request of the drawer of the check made after the draft had been mailed.^^ The general rule may also be modified by a general course of dealing between banks. For example, a bank which received for collection a check drawn on another bank, which for fifteen years had been its correspond- ent under an agreement that all collections made by it for the former bank should be credited to such bank in a weekly settlement, sent the check to the drawee bank and received the customary credit. The drawee at the isKirkham v. Bank of America, 165 N. Y. 132, 58 N. B. 753, affirming 26 App. Div. 110, 49 N. Y. Supp. 767. See, also, Bufaula Grocery Co. v. Missouri Nat. Bank, 118 Ala. 408, 24 So. 389: isHarley v. Eleventh Ward Bank, 7 Daly, 476, affirmed In 76 N. Y. 618. 17 Gregg V. Bi-Metallic Bank, 14 Colo. App. 251, 59 Pac. 852. (187) § 123 BANK COLLECTIONS. [Ch. 6 same time, charged the account of the drawer with the amount of the check, and suspended payment next day. It was held that, under the arrangement between the banks, the drawee had the right to substitute itself as debtor in the place of the drawer, and that the collect- ing bank must be regarded as having accepted the re- sponsibility of the drawee, upon its credit in the collec- tion account, as payment of the check.^* A recent Tennessee case also exemplifies the excep- tion to the rule. The correspondent bank, on present- ment of a draft to the drawee, was directed by him to present it at a certain bank, and did so, such bank hav- ing sufficient funds of the drawee to pay it. The lat- ter bank took up and canceled the draft, and delivered it up to the drawee, and took credit therefor on a set- tlement with him, but paid no money out on account of the draft. In a settlement between such bank and the correspondent bank, the draft was embraced and credit given therefor to the correspondent bank, which in turn credited the initial sending bank, but remitted no money to it. Both of the banks other than the ini- tial bank became insolvent; the correspondent bank having at the time a large credit in its favor on the books of the other insolvent bank. It was held, in view of the general custom of banks to make settlements by mutual credits and debits, that, as between the holder and the draAvee, the draft was collected and paid.^^ isBriggs V. Central Nat. Bank, 89 N. Y. 182, 42 Am. Rep. 285, affirming 10 Daly, 179, 61 How. Pr. 250, and distinguishing Indig V. National City Bank, 80 N. Y. 100. 19 Howard & Co. v. Walker, 92 Tenn. 452. (188) Oh. 6] COLLECTION AND REMITTANCE. § 124 § 124. Completion of collection by application of deposits to payment — Effect of failure to so apply deposits. Where a bank, holding for collection a bill against one of its customers, receives from him a deposit suf- ficient to pay it, with special instructions to apply such deposit to its payment, but becomes insolvent without having done so, and after having merely given the drawee a general credit on its books for the sum depos- ited, the bill is not paid as between the holder and the drawee.^" The same rule applies where the bank cus- tomarily uses a customer's deposits to pay claims against him received for collection, so that a deposit of funds to meet a particular claim and others does not consti- tute a payment as against the creditor in case the bank fails before such funds are appropriated as directed.^^ The same principle was applied in an important Mich- igan case, on a somewhat different state of facts. The maker of a note payable at a bank deposited with an- other bank, before maturity, money with which to take it up, and directed it to so apply such money, but the latter bank failed after receiving the note from the hold- er, indorsed to its order for collection, without having remitted to the holder or canceled the note or the credit given the depositor at the time of the deposit. It was held that, as between the holder and the maker, the note was not paid.^^ But it has been held recently in Ar- kansas that, where the maker of a note sent for col- 20 Moore V. Meyer, 57 Ala. 20. Authority of collecting bank to apply customer's deposits to pay- ment of paper, see ante, § 42. 21 Moore v. Meyer, 57 Ala. 20. 22 Sutherland v. First Nat. Bank of Ypsilanti, 31 Mich. 230. (189) § 125 BANK COLLECTIONS. [Oh. 6 lection to a bank where lie had a deposit sufficient to cover it, directed the bank to apply it on the note, and the bank thereupon charged his account with the amount thereof, and credited the sending bank, there was a pay- ment of the note, precluding a recovery by the sending bank against the maker, the collecting bank having failed without indorsing any payment on the note or paying the sending bank.^^ Another interesting case in point was recently decided by the Kansas court of appeals. In that case the hold- ers of school district orders caused them to be sent for collection to a private bank, composed solely of the treas- urer of the school district, who, at the time, had in his possession money of the school district sufficient to pay them, and marked them "Paid," credited himself as treasurer with the amount, and delivered the canceled orders to the clerk of the school district. He also en- tered payment of the orders on the collection registry of the bank, but a draft given by him as the bank for the amount of the orders was protested for nonpayment. It was held that, as between the holders of the orders and the school district, the orders had been paid.^* § 125. Withdrawal of deposit. Where the deposit is on an express condition, as where a note is sent for collection to a bank in which the mak- er has funds, and the maker instructs the bank to pay it out of such funds on condition that no interest or exchange be charged, the maker can Avithdraw his funds 23 Daniel v. St. Louis Nat. Bank, 67 Ark. 223, 54 S. W. 214. 2* Globe Furniture Co. v. School District No. 22, 6 Kan. App. .889, 50 Pac. 978. (11.0) Ch. 6] COLLECTION AND REMITTANCE. | '^21 at any time before an actual aijpropriation of the funds is made ^^ to payment of the note. Such appropriation did not take place where the senders of the collection were informed of the condition, and gave no assent there- to.28 § 126. Effect of payment to correspondent bank. The doctrine that the collecting bank is a bailee, and that its correspondents are its own agents, necessarily results in holding that payment of the collection to the correspondent bank, and an entry of the proceeds to the credit of the initial bank on the books, the initial bank being at the time apparently solvent, and the cor- respondent having no notice of its insolvency, is a pay- ment to the initial bank which, instaiiter, becomes debt- or to the owner for the amount collected.^''^ So, also, where a note is payable at the bank to which it is sent for collection, and such bank has no express authority to employ another bank as subagent, but nevertheless employs one, a payment to the latter is not a payment to the owner.^* S 127. How remittance made — Check, draft, or certificate of collecting bank. As the relation of bailor and bailee or of principal and agent ceases when the monej- is actually collected, and that of debtor and creditor begins, the collecting 25 Bellows V. Norton, 12 Heisk. (Tenn.) 319. 26 Bellows V. Norton, 12 Heisk. (Tenn.) 319. 2T Reeves v. State Bank, 8 Ohio St. 465, 482. 28 Sherman v. Port Huron Engine & Thresher Co., 8 S. D. 343, 66 N. W. 1077. (191) § 128 BANK COLLECTIONS. [Ch. 6 bank is not bound to remit the identical money collected, nor is it the duty of the payor to see that it does so.^" If the bank had been expressly instructed to hold the proceeds as a special deposit, it would, of course, have to keep the identical cash received intact. But, in the absence of any such instructions, the custom of remit- ting by check or draft or certificate for the proceeds of a collection, instead of remitting the exact money collected, is so general and universal that the courts take judicial notice of it.^" However, it has been held that Avhere the collecting bank gives its own draft for the proceeds of a collection actually received, the transaction does not amount to a remittance until that draft is paid.*^ This is in ac- cord with the general rule of commercial paper that, unless it is so specifically agreed, a check or draft for the amount thereof is not a payment of a negotiable in- strument.^^ § 128. Payment by mistake, and recovery of payments made by mistake. A bank which has paid the amount of a draft to the 29 First Nat. Bank of Richmond v. Wilmington & W. R. Co., 23 C. C. A. 200, 77 Fed. 401; Bowman v. First Nat. Bank of Spokane, 9 Wash. 614, 38 Pac. 211; Hallam v. Tillinghast, 19 Wash. 20, 52 Pac. 329. 30 Bowman v. First Nat. Bank of Spokane, 9 Wash. 614, 38 Pac. 211; First Nat. Bank of Richmond v. Wilmington & W. R. Co., 23 C. C. A. 200, 77 Fed. 401. See, also, Hallam v. Tillinghast, 19 Wash. 20, 52 Pac. 329. 31 People V. Bank of Dansville, 39 Hun (N. Y.) 187. Authority of bank to receive paper of debtor in payment, see ante, §§ 46-49. 32 Burkhalter v. Second Nat. Bank of Erie, 42 N. Y. 538, 40 How. (]92) Ch. 6] COLLECTION AND REMITTANCE. ^ 128 payee before maturity, in the mistaken belief that the draft had been accepted and paid, may recover it back, if such payee has lost none of his rights against the drawer by reason of the mistake.^^ So, too, where the correspondent bank has paid over the amount to the transmitting bank, and the latter to the holder, in the mistaken belief that the paper had been paid, the cor- respondent may recover the amount from the holder.^* A Kentucky case applying the same rule holds that where the initial bank has paid the amount of a draft to the owner, and he has given a receipt to the debtor, on mistaken information from a correspondent that the draft had been paid, sucli correspondent being account- able to the initial bank, may recover the amount of the draft from such owner, the receipt being merely prima facie evidence of payment, and hence subject to contra- diction.?'' Where a bank receives and holds money paid to it under a mistake of fact by the drawee of a draft sent to it by the owner for collection, the drawee, by givinc, notice to that effect before the agent bank had turned over the money to its principal, may elect to hold either Pr. 324; Hamill v. German Nat. Bank, 13 Colo. 203; Western Brass Mfg. Co. V. Maverick, 4 Tex. Civ. App. 535, 23 S. W. 728. 33 De Nayer v. State Nat. Bank, 8 Neb. 104. It was no defense that the maker had called at the bank before maturity of the draft, and expressed surprise at its payment before maturity, and stated to the officers of the bank that he would protect the draft, and that, if it was not paid, he had money with which to pay. it. Id. 34 Bank of Orleans v. Smith, 3 Hill (N. Y.) 560. 35 First Nat. Bank of Chattanooga v. Behan, 91 Ky. 560, 16 S. W. 368, citing Mayer v. City of New York, 63 N. Y. 457. (193) § 129- BANK COLLECTIONS. [Ch 6 responsible as for money had and received.^® But an election once made to hold one of them is binding, and constitutes a renunciation of all right to recourse against the other."'^ The effect of the payment of forged or altered paper, and the right to recover back payments made on such paper, will be considered in a later chapter.^® § 129. Mistake as to solvency of obligor, or sufficiency of customer's deposits. As a bank is required to know the state of a custom- er's account, and pays his checks at its own risk, so far as third persons are concerned, it is no defense to an action against a bank on a draft given by it for the amount of a customer's check that the draft was given in the mistaken belief that the customer had sufi&cient funds in the bank to pay the check.^® But it has been held in NeAV York that the fact that a note payable at a bank, after having been delivered to it by the holder for collection, and charged to the account of the maker, which was not good for the amount, was paid by the bank to the holder, and stamped Avith a cancellation mark, does not show that the note was paid and extin- guished as between the bank and the maker, but the 36Bufaula Grocery Co. v. Missouri Nat. Bank, 118 Ala. 408, 24 So. 389, and cases and authorities cited. 3T Bufaula Grocery Co. v. Missouri Nat. Banli, 118 Ala. 408, 24 So. 389; Cook v. Cook, 28 Ala. 660; Fowler v. Bowery Sav. Bank, 113 N. Y. 450, 21 N. B. 172, 10 Am. St. Rep. 479. 38 Chapter 8. 39 First Nat. Bank of Denver v. Devenish, 15 Colo. 229, 25 Pac. 177, 22 Am. St. Rep. 394. (104) Ch. 6] COLLECTION AND REMITTANCE. § 129 bank may sue him on it as a subsisting security.*" On examination of this case, however, it will be seen that, under the rules and practice of the bank, the cancella- tion mark meant merely that the paper had been charged to the account of the maker. A bank's certification of a note payable at the bank, the maker having an account there, makes the note the primary absolute obligation of the bank, regardless of the sufficiency of the maker's account to meet the note, and the bank, as against the holder, cannot rescind its contract on the ground of mistake as to that fact.*^ The general rule that, where money has been paid by one joint agent to another through mistake, and has not been forwarded by the latter to the principal, or he has not done some act before notice of the mistake, on the assuniption that the payment was good, by which he would suffer some damage if it should be held not good, the agent so paying may recover back the money so paid,*^ does not apply to relieve a collecting bank which had taken the worthless check of the drawee in pay- ment of a draft sent it for collection, and surrendered the draft to him, and remitted cash for the amount to another intermediate collecting bank, since by so do- ing without authority it had made the check its own, 10 Watervliet Bank v. Wllte, 1 Denio (N. Y.) 608. To same effect is Manufacturers' Nat. Bank. v. Thompson, 129 Mass. 438. 11 Riverside Bank v. First Nat. Bank of Shenandoah, 20 C. C. A. 181, 74 Fed. 276. The certification in this case was made at the instance of another bank, acting as collecting agent for the holder of the paper. 42Herrick v. GaUagher, 60 Barb. (N. Y.) 566; Cox v. Prentice, S Maule & S. 348; BuIIer v. Harrison, 1 Cowp. 568; Mechem, Agency, J§ 560-562. (195) § 129 BANK COLLECTIONS. [Ch. 6 and mere mistake as to the solvency of the drawee in such case is not such a mistake of fact as is contemplated by such general rule.^^ As to the right of a bank to rescind its contract evi- denced by its draft or check given in payment, after the same has been actually placed in the mails, on a subsequent discovery of the insolvency of the obligor, or of the insufficiency of his deposits to meet the claim, there is a conflict of authority. The better rule is found in a Wisconsin decision that, where a bank to which a draft was sent for collection advanced the funds to pay the same at the request of the drawee, and mailed its own draft to the payee with a letter stating that it was in payment of the draft sent for collection, and the bank thereafter, on discovering the insolvency of the drawee, withdrew the letter from the mails, and de- stroyed its draft, it was liable to the drawer of the first draft for the amount thereof, with interest.** Posting the draft in such case was a delivery thereof to the payee, and after the posting, the bank had no right to take the draft from the mails.*^ *3 National Bank of Commerce v. American Exchange Bank, 151 Mo. 320, 52 S. W. 265 ; Boylston Nat. Bank v. Richardson, 101 Mass. 287; Canterbury v. Bank of Sparta, 91 Wis. 53, 64 N. W. 311. a Canterbury v. Bank of Sparta, 91 Wis. 53, 64 N. W. 311. See, also, Gregg v. Bi-Metallic Bank, 14 Colo. App. 251, 59 Pac. 852; Boylston Nat. Bank v. Richardson, 101 Mass. 287; Pratt v. Poote, 9 N. Y. 463; Whiting v. City Bank of Rochester, 77 N. Y. 363; Eaton V. Ccok, 32 Vt 58. ■45 Canterbury v. Bank of Sparta, 91 Wis. 53, 64 N. W. 311; Gregg V. Bi-Metallic Bank, 14 Colo. App. 251, 59 Pac. 852; Buell V. Chapin, 99 Mass. 594; Kirkman v. Bank of America, 2 Cold. (Tenn.) 397; Mitchell v. Byrne, 6 Rich. Law (S. C.) 171; 1 Daniel, Neg. Inst. § 67. (196) Ch. 6] COLLECTION AND REMITTANCE. ^ 130 But the supreme court of California has come to a different conclusion on a similar state of facts. The payee delivered a note to a bank for collection, and the maker, who was a customer of the hank, on present- ment, directed the hank to charge the amount to his account, but at the time was indebted to the bank, and had no money on deposit. The hank, supposing his credit to be good, charged his account, and canceled the note, and wrote out a check, which it deposited in the post oflflce; but, on discovering on the same day the insolvency of the maker of the note, indorsed on the note that it had been erroneously canceled, and with- drew its check from the mails. It was held that there was no payment of the note, the bank having a right to rescind its contract on the ground of mistake.*® ^ 130. Voluntary payment by bank cannot be recovered back. A payment by the bank, not made by mistake, but voluntarily, on the credit of the maker, cannot be re- covered back.*^ 46 Steinhart v. National Bank of D. 0. Mills & Co., 94 Cal. 362, 29 Pac. 717, 28 Am. St. Rep. 132. 47 Whiting V. City Bank of Rochester, 77 N. Y. 363. Unsworn declarations of the assistant cashier, who was not the person alleged to have made the mistake, are not sufficient evidence that a payment by the hank was made by mistake, and not volun- tarily. Id. (197) BANK COLLECTIONS. [Ch. 7 CHAPTER VII. RIGHTS AND LIABILITIES AS TO PROCEEDS. (A) In General. § 131. Who entitled to proceeds in general. 132. Bona fide holders of paper. 133. Rights of creditors of owner. 134. Proceeds of paper belonging to firm or partner. 135. Proceeds of judgment on joint claims of bank and de- positor. 136. Liability of correspondent bank to owner. 137. For conversion. 138. Liability of correspondent to initial bank. 139. Title and rights as between initial and correspondent banks in general. 140. Estoppel of initial bank to deny ownership. 141. Effect of rules and usages of clearing houses. 142. Lien of correspondent bank on proceeds for debt of initial bank. 143. When correspondent a bona fide purchaser of paper. 144. Notice of real ownership of paper. 145. Proceeds of paper originally indorsed in blank. (B) Enforcing Preference or Establishing Trust. § 146. In general. 147. Fraudulent conversion as creating preference or trust. 148. Remittance made by draft or check — Drawer or drawee bank insolvent. 149. Refusal to pay customer's' check does not give preference. 150. Tracing and following proceeds into insolvent estate of collecting bank. 151. Proceeds never in possession of bank. 152. Amount of note. against customer charged to his ac- count before insolvency of bank. (198) (Jll 7] RIGHTS AND LIABILITIES. 153. Proceeds disposed o£ before insolvency. 154. Proceeds collected by assignee or receiver. 155. Bank as owner of paper and proceeds. 156. Preference limited to assets realized at time of failure of bank. 157. Waiver of preference or trust. (A) In General. The collecting bank is liable to the owner for the proceeds when collected by itself or its agents. If special directions have been given by the owner to pay to some other person, the bank must govern its actions accordingly. Bona fide holders of the paper are entitled to the proceeds thereof from the collecting bank. The general rules of com- mercial paper govern in determining who are bona fide hold- ers. The rights of creditors of the owner of the paper, after a completed collection, depend on the ownership of the proceeds as between the bank and the debtor. In Georgia, the proceeds of paper originally indorsed "for deposit and credit" are sub- ject to garnishment as the property of the indorser. If the paper was unindorsed, the proceeds in the hands of the bank are not subject to trustee process at the instance of a creditor of the payee. The proceeds of paper belonging to a member of a firm can- not be used without his consent to pay partnership obligations ; but the proceeds of firm paper may be so used if such use is justified by a course of dealing. The correspondent bank may, in certain cases, become re- sponsible to the owner for the proceeds, but is not liable for conversion, in the absence of a demand. Mere insolvency of such bank does not amount to a conversion. As between banks which are members of a clearing house association, the rules and customs of such association as to the disposition of the proceeds of collections are binding; but, as against the original owner, the effect of such rules and (199) § 131 BANK COLLECTIONS. [Gh. 1 customs may be negatived by the form of the indorsement on the paper, or other notice of his ownership. The right of the correspondent bank to a lien on the pro- ceeds for an indebtedness of the sending bank depends on the nature of the dealings between the banks, the character of the paper and its indorsements, and the knowledge of the creditor bank of the real ownership of the paper. In some jurisdictions, the correspondent bank may become a holder for value, as against the original owner, by reason of the antecedent debt of the initial bank; but it cannot become a bona fide holder if it has notice of the real ownership of the paper. An indorse- ment to the initial bank "for collection'* is such notice. "Where the paper was originally indorsed in blank, the lien of the correspondent bank for a debt of the initial bank is usually -.sustained. § 131. Who entitled to proceeds in general. It may be stated as a general rule that the collecting bank is liable to the owner for the payment of the money when collected by itself,^ and, in those jurisdictions 1 Hyde v. First Nat. Bank of Lacon, 7 Biss. 156, Fed. Cas. No. 6,970; First Nat. Bank of Leadville v. Leppel, 9 Colo. 594, 13 Pac. 776. But a bank holding a customer's demand note has a lien on the proceeds of drafts delivered to It for collection after the giv- ing of the note, though collected after the filing of a petition in bankruptcy, and can apply such proceeds on the note. In re Farnsworth, 5 Biss. 223, Fed. Cas. No. 4,673. As to general lien of bank on the paper, see ante, § 23. In an action against a bank for the proceeds of a collection, the books of the bank showing original entries are admissible to establish a balance due the bank. McLennan v. Bank of Califor- nia, 87 Cal. 569, 25 Pac. 760, and cases cited. The maker of a note who has paid the amount thereof to the bank at which it was payable, and to which it had been indorsed by the payee for collection, and obtained a surrender of the note, cannot maintain an action against the bank for misappropria- (200) Ch. 7] RIGHTS AND LIABILITIES. § 131 holding that persons or banks employed by the initial bank are its agents, it is liable to such owner for the proceeds when collected by such agents.^ So, too, in those jurisdictions allowing the bank to sue on the paper in its own name, the amount recov- ered is, of course, held by the bank for the use and ben- efit of the owner.^ Sometimes, however, the bank is ordered by the owner to pay the proceeds to a designated person, or has special notice or instructions relative to payment of the proceeds, and in any of such cases its actions should be governed accordingly.* Thus-, an or- der by the customer to the collecting bank to "deliver" the proceeds of drafts, if they had been collected and credited to the customer, to a designated third person,^ is equivalent to an order to "pay" to such person the amount of the drafts if then collected, so that an accept- tion of the fund, since he was, by such payment, absolutely dis- charged from liability. Smith v. Essex County Bank, 22 Barb. (N. Y.) 627. The bank in this case was agent of the payee only. Id. A written promise to account for the proceeds of notes left for collection with the promisor is not negotiable, as the amount to be paid is not a sum certain. Piske v. Witt, 22 Pick. (Mass.) 83. That an action on the case will not lie against the collecting bank for failure to turn over the proceeds of the collection, see Tinkham v. Heyworth, 31 111. 519. 2 Hyde v. First Nat. Bank of Lacon, 7 Biss. • 156, Fed. Cas. No. 6,970; Reeves v. State Bank, 8 Ohio St. 482; Sherman v. Port Huron Engine & Thresher Co., 8 S. D. 343, 66 N. W. 1077. See, .also, cases cited under sections 86-98, ante. 3 Bank of Louisiana v. Stansbury, 4 La. 530 ; Padfleld v. Green, 85 111. 529; Cottle v. Cole, 20 Iowa, 485; Merchants' Bank of Bal- timore V. Bank of Commerce, 24 Md. 12, 52. i Commercial State Bank- v. Rowland, 31 Neb. 483, 48 N. W. 149. (201) § 131 BANK COLLECTIONS. [Ch. T ance of the order by the bank, and a payment of the- proceeds to the person so designated, operated as a pay- ment of the debt of the bank to the customer.^ A bank will also be protected in paying the proceeds of checks, payable to a corporation, to one who had been accustomed to collect moneys and pay bills for the cor- poration at the bank, with the knowledge and consent of the officers of the corporation, and who had indorsed the name of the corporation on the checks; the corpo- ration being, in such case, estopped to deny the author- ity of such person to receive the money.'' But, where- a note for the price of timber was left at a bank for col- lection, and the bank was notified that the note was the- property of the vendor of the timber, though made pay- able to one who had been employed to cut the timber, and was also indemnified against the claim of such per- son, the bank is liable to such vendor for the full amount of the collection, after having paid it over to the em- ploye, notwithstanding the notice.''^ sWeedsport Bank v. Park Bank, 2 Rob. (N. Y.) 418. 6 Craig Medicine Co. v. Mercliants' Bank, 59 Hun, 561, 14 N. T.. Supp. 16. See, also. Central Nat. Bank of Baltimore v. Connecticut Mutual' Life Ins. Co., 104 U. S. 54, where it was held that a bank in which the general agent of a corporation had deposited its funds, as its general agent, but had deposited his own funds in the same- account, and drew checks on it for his private use, was charged with notice of the equitable rights of the company, and could not retain a lien for a private debt of the agent as against the- beneficial ownership of the company. Citing Duncan v. Jaudon, 15 Wall. (U. S.) 165; Shaw v. Spencer, 100 Mass. 382, and other cases. To same effect, see Importers' & Traders' Nat. Bank v. Peters, 123 N. Y. 272. See, also, Englar v. Offutt, 70 Md. 78, 16 Atl. 497. ' First Nat. Bank of Wellsborough v. Bache, 71 Pa. St. 213, cit- (202) Ch. 7] RIGHTS AND LIABILITIES. § 132 A recent Iowa case determines the right to the pro- ceeds where collection was made after the bank had redelivered the paper to the depositor. In that case credit was given by a bank for the amount of a draft indorsed to it and delivered for collection, 'and the draft was forwarded to the drawee bank, where it was pro- tested. On its return, it was redelivered to the depos- itor, and the amount charged back to him. Thereafter he again sent the draft to the drawee, and it was paid to such drawee by the drawer. It was held that the proceeds belonged to the depositor, so that he could re- cover damages for the wrongful garnishment thereof by one having no valid claim against such depositor.^ § 132. Bona fide holders of paper. Bona fide holders of the paper occupy the same favor- able position with respect to the proceeds of a collection that they occupy with respect to other transactions af- fecting the paper.* So, where a banker, with whom drafts indorsed in blank were left for collection, wrong- fully sold them, the purchaser, having no knowledge that he was not the real owner, is a bona fide holder, and may retain the proceeds as against the real owner.^** The latter could easily have restricted the indorsement in the first place, and thus protected himself. As against the collecting bank, an indorsee of a draft ing Farmers' & Mecliamcs' Nat. Bank v. King, 57 Pa. St. 202. The court in the first case above cited treated the fund as a trust fund for the benefit of the vendor. 8 Pickering v. Cameron, 103 Iowa, 186, 72 N. W. 447. » Correspondent bank as bona fide holder, see post, §§ 143, 155. 10 Coors V. German Nat. Bank, 14 Colo. 202, 23 Pac. 328. (203) § 133 BANK COLLECTIONS. [Ch. 7 in payment of an antecedent debt is a bona fide pur- chaser.^^ But a purchaser of one of several overdue and dishonored mortgage notes, which was fraudulently- transferred by an agent of the collecting bank after pro- test, is not a bona fide holder, and is not entitled to share as such in the proceeds of a subsequent sale under the mortgage.^ ^ § 133. Rights of creditors of owner. We have seen, in treating of the special property rights of the bank as bailee for collection prior to re- ceipt of the proceeds, that the paper itself is not attach- able before collection, at the instance of creditors of the depositor." The right of creditors of the depositor to attach or garnish the proceeds in the hands of the bank depends primarily on the question of the owner- ship of the proceeds, as between the depositor and the bank.i* The supreme court of Georgia holds that the payee of a bill who indorses it "for deposit and credit" is not only the owner of the bill, but retains ownership of the proceeds after collection, so that it is subject to gar- nishment as his property in the hands of the collecting 11 Citizens' Nat. Bank of Lawrenceburg v. Third Nat. Bank of Greensburg, 19 Ind. App. 69, 49 N. B. 171; Straughan v. Pair- child, 80 Ind. 598. Rights of bank taking paper for antecedent debt of sending bank, see post, § 143. 12 Foley V. Smith, 6 Wall. (tJ. S.) 492. 13 See ante, § 22. "Pickering v. Cameron, 103 Iowa, 186, 72 N. W. 447. As to title to paper, see ante, §§ 11-23. (204) Ch. 7] RIGHTS AND LIABILITIES. § I33 bank.^^ In a later case, however, the same court liolds that if a regular customer of a bank indorses paper to the bank "for deposit and credit" to his account, and receives credit against which lie is allowed to draw, the proceeds of the paper in the hands of a correspond- ent of the initial bank are not subject to. garnishment as the property of such indorser, since they are the property of the initial bank.^*^ In Massachusetts it has been held that a bank to which a note without any indorsements Avas sent for collec- tion is not chargeable in trustee process (garnishment) at the instance of a creditor of the payee, where it shows that, on the day the writ was served, it had the note in its possession, and collected it, and passed the proceeds to the credit of the sending bank on its open account, in accordance with directions received with the note; that it had never received notice from defendant (the payee) that the proceeds belonged to him; and that the sending bank, on notification of the service of the writ, had replied that it would "take care of it.''^^ A bank which has received a note for collection can- not defend an action by the depositor for the proceeds of the note, on the ground that the note was originally executed to defraud creditors of a third person, and that a garnishment proceeding was pending, seeking to subject the note to payment of a debt of such third per- is Freeman v. Exchange Bank of Macon, 87 Ga. 45. ic Fourth Nat. Bank of Cincinnati v. Mayer, 89 Ga. 108, distin- guishing Freeman v. Exchange Bank of Macon, 87 Ga. 45, and Central Railroad v. First Nat. Bank of Lynchhurg, 73 Ga. 383. IT Richards v. Stephenson, 99 Mass. 311. See, also, Hancock v. Colyer, 99 Mass. 187. (205) § 134 BANK COLLECTIONS. [Ch. 7 son, if the bank itself was not one of the creditors; it appearing that the bank was in no way liable in the garnishment proceeding.^* i 134. Proceeds of paper belonging to firm or partner. In the absence of express instructions, a banker has no authority to apply the proceeds of a collection to discharge a note, not payable at the bank, executed by a firm of which the owner of the collection was a mem- ber, for the claims are in different rights.^® Even if the paper was entirely unindorsed, a bank with actual notice prior to collection, of a transfer of the claim to plaintiff by the payee, cannot use the pro- ceeds to pay to a third person a note, not payable at the bank, executed by a firm of which plaintiff's transferror was a member.^" But a custom of a particular firm to deposit its customers' notes in a bank for collection, and to allow the bank to treat the paper as collateral for the debts of the firm to the bank, and credit the proceeds of collections on the firm's account, justifies the bank in retaining the proceeds of notes so deposited and collected, and applying the amount on a balance due on the firm's account.^^ IS First Nat. Bank of Leadville v. Leppel, 9 Colo. 594, 13 Pac. 776. 19 Commercial State Bank v. Rowland, 31 Neb. 483, 48 N. W. 149, citing 1 Morse, Banks & Banking! § 326. 20 Commercial State Bank v. Rowland, 31 Neb. 483, 48 N. W. 149. 21 Studebaker Bros. Mfg. Co. v. First Nat. Bank of Sulphur Springs (Tex. Civ. App.) 42 S. W. 573, citing Bank of Metropolis V. New England Bank, 1 How. (U. S.) 234, 6 How. 211, and Central Nat. Bank of Baltimore v. Connecticut Mutual Life Ins. Co., 104 U. S. 54, 77. (206) Ch. 7] RIGHTS AND LIABILITIES. "§ 136 § 135. Proceeds of judgment on joint claims of bank and depositor. A peculiar case arose in California, where, it appears, it is permissible for the collecting bank to join in one suit the claim of its customer and. a claim of its own against the same debtor. A bank agreed to collect notes against one who was also indebted to the bank, and agreed to pay the proceeds over to the owner of the notes, after deducting the cost of collection. The bank joined its own claim Avith the claim on the notes in one suit, and recovered judgment for the aggregate of both claims, and bought in the debtor's property at a sale on execu- ' tion under the judgment, there being no other bidders, for the benefit of itself and the owners of the notes. The proceeds of the sale were not sufficient to pay both -claims. It was held that the bank and the owners of the notes were entitled to share in the proceeds of the ■sale in the proportion in which their respective claims had paid the purchase price at the sale.^^ S 136. Liability of correspondent bank to owner. Where there are no mutual accounts between the in- itial and correspondent banks, but remittances of col- lections are made at stated periods, the owner may re- cover the proceeds of a collection directly from the cor- respondent prior to the time of an actual remittance by the correspondent, or of a credit by the initial bank of 22 Marks v. Bodie Bank (Cal.) 8 Pac. 807. The title having ibeen taken by the bank, was held in trust for the owners of the :notes to the extent of their interest. Id. (207) § 137 ' BANK COLLECTIONS. [Ch. 7 the proceeds to the account of the owner.^^ A some- what different statement of the rule is that the corre- spondent, not having remitted the proceeds collected to the initial bank, and not having a right of set-off, is liable directly to the owner of the paper if the indorse- ment and instructions plainly show that he still has title to the paper.^* And under this rule the owner majr recover the proceeds from the correspondent bank, though it has credited the amount to an intermediate collecting bank.^^ Where there are mutual accounts and dealings be- tween the banks, whereby the correspondent bank takes the paper for collection as the property of the initial bank, without notice that it is not the real owner, the rules are different, as we shall see later.^'^ § 137. For conversion. The correspondent bank is not, however, liable to the OA^'ner for conversion of a draft received in payment of the collection, and lawfully coming into its possession, in the absence of a demand by him for the draft or its proceeds.-^ And where the proceeds of the collections 23 National Exchange Bank of Dallas v. Beal, 50 Fed. 355, af- firmed in 55 Fed. 894. 2* First Nat. Bank of Circleville v. Bank of Monroe, 33 Fed. 408; Boykin v. Bank of Payetteville, 118 N. C. 566, 24 S. E. 357; Commercial Nat. Bank of Cincinnati v. Hamilton Nat. Bank of Ft. Wayne, 42 Fed. 880. 25 Branch v. United States Nat. Bank of Omaha, 50 Neb. 470, 70 N. W. 34; Boykin v. Bank of Fayetteville, 118 N. C. 566, 24 S. E. 357. 26 See post, §§ 142-145. 27 Castle V. Corn Exchange Bank, 148 N. Y. 122, 42 N. E. 518. An order from the drawer of the paper collected, to hold the (208) Cll, 7] RIGHTS AND LIABILITIES.- § 138 made on commission, and under an agreement for daily remittances, were mingled with the other funds of the collecting bank at a time when its cashier had no knowl- edge of its insolvency, the collecting bank is not charge- able with conversion of the funds, though it was in fact insolvent when it received them, and failed soon after.^^ § 138. Liability of correspondent to initial bank. As a logical deduction from the rules that the initial bank is liable for the defaults of its correspondents, that it must account to the owner for the paper or its pro- ceeds, and that it has a resultant remedy over against the correspondent, it may be stated that the correspond- ent bank is liable to the initial bank for the proceeds of the collection when realized.^^ It has been held, how- ever, in one of the jurisdictions which upholds the con- trary doctrine, viz., that the correspondent bank is the agent of the owner of the paper, and that the initial bank is not liable for its defaults, that on refusal or failure of the correspondent bank to pay over the money to the initial collecting bank, the latter cannot sue the former, but the owner of the paper is the real party in interest, and must bring the suit.^" draft, is not a demand on behalf of the owner, no agency being shown. Id. That trover will not lie by the owner where the paper was in- dorsed in blank, and the correspondent advanced money on it to initial bank, see post, § 145. ^8 First Nat. Bank of Richmond v. Davis, 114 N. C. 343, 19 S. E. 280, 41 Am. St. Rep. 795. 29 See ante, §§ 85-98. aoAbrams v. Cureton, 74 N. C. 523; Boykin v. Bank of Payette- ville, 118 N. C. 566, 24 S. B. 357. (209) § 139 BANK COLLECTIONS. [Ch. 7 I § 139. Title and rights as between initial and correspondent banks in general. It is a settled rule that title to the proceeds of com- mercial paper received for collection by a bank, and forwarded to its correspondent in due course of busi- ness, without any express agreement in reference there- to, does not pass to the correspondent, even if it remit- ted on general account, in anticipation of collection.*^ Credit given "subject to payment" on receipt of pa- per for collection, under a contract with the sending bank permitting unpaid items to be charged back, is merely provisional, and does not create a debt or change the ownership of the paper or proceeds.^ ^ It is also a settled rule of law that where the banks have no mutu£^l arrangement that remittances shall be credited on previous accounts, and no advances are made on the faith of any particular collection, no lien exists in favor of the initial bank which will prevent the owner from recovering the amount of the collection, though such bank has credited the amount to its correspondent in payment of its indebtedness.*^ siDickerson v. Wason, 47 N. Y. 439; Scott v. Ocean Bank, 23 N. Y. 289; National Park Bank v. Seaboard Bank, 114 N. Y. 28, 34, 20 N. B. 632, 11 Am. St. Rep. 612. See, also, ante, §§ 15, 16, and McBride v. Farmers' Bank of Salem, 26 N. Y. 450. Certain correspondence between banks held to constitute a contract for collection of items forwarded by one to the other, and not a contract to purchase. Richardson v. Louisville Bank- ing Co., 36 C. C. A. 307, 94 Fed. 442. 32 Manufacturers' Nat. Bank v. Continental Bank, 148 Mass. 553, 20 N. E. 193, 12 Am. St. Rep. 598, 2 L. R. A. 699; Levi v. National Bank of Missouri, 5 Dill. 104, Fed. Cas. No. 8,289. See, also, ante, § 15. 33Millikin v. Shapleigh, 36 Mo. 596, 88 Am. Dec. 171; Wilson (210) Oh. 7] RIGHTS AND LIABILITIES. § 140 § 140. Estoppel of initial bank to deny ownership. The initial bank may become estopped to deny its ownership of the paper and its proceeds. Thus, where a draft for the price of goods, payable to the order of the cashier of a bank at the place of the drawer's resi- dence, "on arrival of car" containing the goods, was indorsed by such bank for collection for its own ac- count, and was sent by it to a bank at the place of resi- dence of the drawee, and the drawee paid the amount to the latter bank under a mistake of fact entitling him to a recovery back, and without knowledge that the draft was not the property of the sending bank, such sending bank, though it never received the money, is estopped, as against the drawee, from denyihg actual ownership of the draft, and setting up a mere agency to collect.^* This decision was not based on the ground that the admission of evidence to show agency would be allow- ing the contradiction of a written instrument by parol, but solely on the ground that the drawee had acquired his rights without knowledge of any agency, and that a principal will not be allowed to take advantage of V. Smith, 3 How. (U. S.) 763; Jones v. Milliken, 41 Pa. St. 252; McBride v. Farmers' Bank of Salem, 26 N. Y. 450, aflarming 25 Barb. 657; Hackett v. Reynolds, ll- Pa. St. 328, 6 Atl. 689; First Nat; Bank of Clarion v. Gregg, 79 Pa. St. 384; Stark v. United States Nat. Bank, 41 Hun (N. Y.) 506; Dod v. Fourth Nat. Bank of New York, 59 Barb. (N. Y.) 265; Llndauer v. Fourth Nat. Bank, 55 Barb. (N. Y.) 75; Hutchinson v. Manhattan Co., 9 Misc. Rep. 343, 29 N. Y. Supp. 1103; Commercial Bank of Clyde v. Ma- rine Bank, 3 Keyes (N. Y.) 337. 3i Eufaula Grocery Co. v, Missouri Nat. Bank, 118 Ala. 408, 24 So. 389. See, also, Cook v. Cook, 28 Ala. 660. (211) § 141 BANK COLLECTIONS. [Ch. 7 his own wrong where, with his authority, the agent re- ceived the money, though he never turned it over to the principal. § 141. Effect of rules and usages of clearing houses. We have seen that the rules and usages of clearing house associations are not binding on the customers of the various banks forming the association.^^ They are, however, binding on the banks that are members of the association.^^ Yet it may be that the form of the in- dorsement on the paper negatives the right of a bank to rely on the usages of the clearing house association. Thus, where a draft on a bank which was a member of a clearing house association was expressly indorsed by the owners "for collection" to another bank, which was also a member of the same association, the indorse- ment will prevent the association from appropriating the proceeds to payment of the indebtedness of the in- dorsee bank to the association, under an agreement by which the exchanges of such bank could be retained by the association until the payment of any balance against such bank;^'' consequently, a payment to the associa- tion by the drawee bank is no 'defense to an action by the owners against such bank for the proceeds.^^ That the rules of the clearing house cannot affect the ownership of the proceeds after there has been an actual absolute payment through the clearing house is exem- 35 See ante, § 10. 38 Overman v. Hoboken City Bank, 30 N. J. Law, 61, 31 N. J. Law, 563; O'Brien v. Grant, 146 N. Y. 173; Atlas Nat. Bank v. National Exchange Bank, 176 Mass. 300, 57 N. E. 605. 37 Crane v. Fourth Street Nat. Bank, 173 Pa. St. 566. 38 Crane v. Fourth Street Nat. Bank, 173 Pa. St. 566. (212) Cll. 7] RIGHTS AND LIABILITIES. § 142 plified in a recent case holding that, where a bank sent to another bank its cashier's check on a third bank for the amount of collections made, such third bank having at the time sufficient funds of the drawer to pay the check, and the check was paid in due course through the clearing house, there was a complete appropriation of the fund to the payee bank, and, the drawer being insolvent, a subsequent temporary restoration of the money by the payee bank to the drawee bank on demand made by it under the rules of the clearing house of which both were members, requiring repayment on demand, and adjustment of the merits of the claim afterwards, did not affect its ownership of the fund.^^ § 142. Lien of correspondent bank on proceeds for debt of initial bank. In the course of the transmission of paper from bank to bank for collection, it often happens that it comes in- to the hands of a bank to which the sending bank is in- debted on general account. The right of the creditor bank in Such case to retain the proceeds to liquidate such debt depends on the nature of the dealings between the banks, the character of the paper and its indorse- ments, and the knowledge of the creditor bank of the real ownership of the paper. Where there has been a course of mutual dealings be- tween two banks, under which paper sent by one to the other was treated as the property of the sending bank, 39 National Union Bank v. Barle, 93 Fed. 330. The drawee bank in this case having paid over the money to a receiver of the drawer bank, the payee bank was held entitled to recover directly from him, as a trustee for its benefit. Id. (213) § 142 BANK COLLECTIONS. [Ch. 7 and credits and debits entered accordingly, and bal- ances remitted at stated intervals, or when called for, the receiving bank has a lien as against the owner, on paper sent to it for collection, for an unpaid balance of account against the sending bank, if the receiving bank had no notice, from the nature of the indorsements, or otherwise, that title was not in the sending bank.^° The correspondent bank is bound to know that it has no lien on paper sent by the initial bank for collection, for a balance against such bank, unless the initial bank was owner of the paper.*^ If the correspondent bank, on the faith of the ultimate collection of unmatured paper sent to it and in its pos- session for collection, allows the remitting bank to draw on the expected funds, and thus realize the proceeds of the paper, before its maturity or payment, it has a lien on the paper as' against the transmitting bank for the amount of the advances until reimbursed.*^ The rule is analogous to the rule allowing a lien on collaterals for advances made.*^ But, in the absence of previous ar- 40 Carroll v. Exchange Bank, 30 W. Va. 518, 4 S. E. 440; Bank of Metropolis v. New England Bank, 1 How. (TJ. S.) 234, 6 How. 212; Rathbone v. Sanders, 9 Ind. 217; Wilson v. Smitli, 3 How. (U. S.) 763. Contra, see Lawrence v. Stonlngton Bank, 6 Conn. 521. The right of the correspondent to set off a debt due it from the initial bank cannot be adjudicated in a suit between the owner and the initial bank, to which the correspondent is not a party. National Exchange Bank of Dallas v. Beal, 50 Fed. 355. 41 Van Amee v. Bank of Troy, 8 Barb. (N. Y.) 312, 321. *2 Williams v. Jones, 77 Ala. 294, and cases cited. The cor- respondent bank may enforce the lien against an assignee for the creditors of the transmitting bank. Id. 43 Williams v. Jones, 77 Ala. 294. (214) Ch. 7] RIGHTS AND LIABILITIES. § 142 rangeinents or mutual dealings, a correspondent bank which has received the paper for collection only from the initial bank to which it has been delivered for col- lection cannot retain the paper as against the owner for an unpaid balance due from the initial bank.** As was said by Holmes, J., in Millikin v. Shapleigh:*^ "But where there is no such mutual arrangement or pre- vious course of dealing between the parties whereby it is expressly or impliedly understood that such remit- tances of paper are to go to the credit of the previous account when received, and no advance is made and no credit is given on the basis of the particular bill, or on the faith of such course of dealing or such remit- tances, or where the special circumstances are incon- sistent with the hypothesis of such mutual under- standing, and the one bank merely passes the pro- ceeds of paper remitted for collection to the credit of the other on a subsisting indebtedness which it happens at the time to have standing against the other, there is no such lien, and no right to retain and apply the money collected in that manner; but the real owner of the funds may maintain an action to recover the amount." So, a mere credit by the correspondent bank to the initial bank does not change the relation to that of cred- itor and debtor, the initial bank not being indebted to the correspondent bank at the time.*" And no mere 44Millikm v. Shapleigh, 36 Mo. 596; Van Amee v. Bank of Troy, 8 Barb. (N. Y.) 312; Hoffman v. Miller, 9 Bosw. (N. Y.) 334, following Warner v. Lee, 2 Seld. (N. Y.) 144, and Scott v. Ocean Bank, 23 N. Y. 289. 45 36 Mo. 596. See, also, Wilson v. Smith, 3 How. (U. S.) 763. 46Guignon v. First Nat. Bank of Helena, 22 Mont. 140, 55 Pac. (215) § 143 BANK COLLECTIONS. [Ch. 7 custom among banks, whereby the collecting bank credits the transmitting bank instead of remitting, can prevail to the prejudice of the rights of the owner of the paper.*'^ If the correspondent bank, on making the collection, credits the proceeds to the sending bank after the latter is insolvent, and in the hands of the bank ex- aminer, the credit does not amount to a payment as against the owner of the paper, though the crediting bank did not know of such insolvency when the credit wjis made.** Where a bank has in good faith accepted the draft of a national bank one day prior to the latter's insolvency, the lien of the former on the proceeds of collections on paper belonging to the latter attaches at the date of the acceptance.*^ § 143. When correspondent a bona fide purchaser of paper. It is the law in New York that a bank receiving notes for collection from another bank acquires no better title 1051, 1097. See, also. Metropolitan Nat. Bank v. Merchants' Nat. Bank, 182 111. 367, 55 N. E. 360, affirming 77 111. App. 316. *T Armstrong v. National Bank of Boyertown, 90 Ky. 431, 438; First Nat. Bank of Clarion v. Gregg, 79 Pa. St. 384; Lawrence v. Stonington Bank, 6 Conn. 521. 48 Evansville Bank v. German-American Bank, 155 U. S. 556, 562, distinguishing Commercial Bank of Pennsylvania v. Arm- strong, 148 V. S. 50. 49 In re Armstrong, 41 Fed. 381. Rev. St. XJ. S. § 5242, invalidating transfers of the commercial paper of a national bank after its insolvency does not prevent the lien from attaching in this case. Id. See, also, Dana v. Third Nat. Bank in Boston, 13 Allen (Mass.) 445; Laclede Bank v. Schuler, 120 U. S. 511, 7 Sup. Ct. 644. (216) •Ch. 7] RIGHTS AND LIABILITIES. § 143 than the remitting bank had unless it becomes a pur- chaser for value; and, prior to the adoption of the ne- gotiable instruments law, the mere existence of a bal- ance against the remitting bank on open account, and for discounts made, did not constitute the correspondent bank a holder for value.^° This is also the law in Mis- sissippi."^ It was also the law in North Carolina prior to the adoption of the negotiable instruments law in that state.^^ But the negotiable instruments law as adopted in New York and North Carolina provides that an antecedent or pre-existing debt constitutes value and hence changes the above rule to that extent.^^ Yet, if the correspondent had notice, from the form of the in- dorsement or otherwise, that the sending bank did not own the paper, it would not be a bona fide purchaser, 50 Commercial Bank of Clyde v. Marine Bank, 3 Keyes (N. Y.) 337; Van Amee v. Bank of Troy, 8 Barb. (N. Y.) 312; McBride T. Farmers' Bank of Salem, 26 N. Y. 450. The court in the case last cited refuses to follow the decisions of the United States su- preme court in Bank of Metropolis v. New England Bank, 1 How. (U. S.) 234, 6 How. 212, and Swift v. Tyson, 16 Pet. 1, hut follows ■Coddington v. Bay, 20 Johns. (N. Y.) 637; Rosa v. Brotherson, 10 Wend. (N. Y.) 86; Stalker v. McDonald, 6 Hill (N. Y.) 93, and Youngs V. Lee, 2 Kern. (N. Y.) 551, on the proposition that an an- tecedent or pre-existing debt is not a sufficient consideration to ■establish a purchase for value. See, also, Clark v. Merchants' Bank, 2 Comst. (N. Y.) 380; Com- mercial Bank of Pennsylvania v. Union Bank of New York, 1 Kern. (N. Y.) 203; Warner v. Lee, 2 Seld. (N. Y.) 144; Scott v. Ocean Bank, 23 N. Y. 289. 51 First Nat. Bank of Meridian v. Strauss, 66 Miss. 479, 6 So. 232. s2 Stevenson v. Fidelity Bank of Durham, 113 N. C. 485, 18 S. E. 695. 53 Laws N. Y. 1897, c. 612, § 51; Public Laws N. C. 1899, c. 733, -i 25. (217) g 143 BANK COLLECTIONS. [Ch. T notwithstanding the above provision of the negotiable instruments law as to what constitutes value.®* So, though paper delivered for collection and sent by the initial bank to its correspondent carries upon it evi- dence by way of an indorsement that the legal title has passed to the correspondent, the correspondent will not be protected, as against the true owner of the paper, unless it is a bona fide holder, and took the paper with- out notice that it was not the property of the initial bank before it obtained possession.^® Where, however, a banker is made the payee of a draft, intended only for collection by him, and indorses the draft to a bank for collection and credit to his personal account at a time when he was indebted to such bank, the latter becomes a bona fide purchaser, and may retain the proceeds as against the original owner, though it was notified by telegraph before it received the proceeds, but after the draft had been paid, that the draft was not the property of such banker when he so delivered it for collection.®" 5* See People's Bank of Lewisburg v. Jefferson County Sav. Bank,. 106 Ala. 523, 17 So. 728; Stevenson v. Fidelity Bank of Durham, 113 N. C. 485, 18 S. E. 695, and cases cited in notes to section 144, infra. 55 Van Amee v. Bank of Troy, 8 Barb. (N. Y.) 312. See, also, Brandao v. Barnett, 3 Man., G. & S. 519, where the house of Lords held (reversing the decision of the court of exchequer chamber [6 Man. & G. 630], which had reversed the decision of the court of common pleas [1 Man. & G. 908]) that where an agent rieposited exchequer bills in a tin box at a banker's, of which box he re- tained the key, and delivered them to the bankers only for the purpose of receiving the interest and exchanging the bills for new ones, wh(ch he again locked up in the box, the bank had no lien on the bills for a balance of the agent's personal account at the bank, though it had no notice of the agency, the bills not having been deposited with the bunk as a bank. soWyman v. Colorado Nat. Bank, 5 Colo. 30, 40 Am. Rep. 133.- (218) Ch. 7] RIGHTS AND LIABILITIES. | 144 An interesting case on this point, decided by the su- preme court of the United States, involved the follow- ing facts : A Cincinnati bank transferred a note pay- able at its office, and a mortgage securing it, to a bank in New York, which discounted the note, and placed the proceeds to the credit of the first bank, Avhich credit had not been canceled at the tinie of a subsequent suit by the second bank to foreclose the mortgage. Specific directions « ere given to the second bank to notify the mortgagee and collect the amount due at maturity and to foreclose in their own name. The note was for three years, but the transfer was made within thirty days of maturity. There was no indorsement to the second bank on the note, but, when sent, it was accompanied by a formal separate instrument containing a guaranty by the first bank of collection and payment, — the guaranty to take effect if the second bank took the note and mort- gage. It was apparent that the transfer was made to fenable the second bank to sue in its own name, and es- cape defense available against the first bank. It was held that the second bank was merely a trustee for col- lection, and was not a bona fide purchaser.^'' § 144. Notice of real ownership of paper. Notice to the correspondent bank, from the nature of the indorsements on the paper or from other sources, that title to the paper and its proceeds was not in the The court in this case applies the doctrine that, where one of two innocent parties must suffer by the act of a third, that one must suffer who by his acts made it possible for such third person to occasion the loss. 57 Lanier v. Nash, 121 U. S. 404, 7 Sup. Ct. 919, 30 L. Ed. 947. (219) § 144 BANK COLLECTIONS. [Ch. 7 sending bank, but remained in the original depositor, negatives any right of the correspondent to retain the proceeds on a debt of the sending bank to itself.^* An indorsement "for collection" is notice to all par- ties or banks into whose hands the paper comes that it was forwarded for collection only, and that there was no intention to transfer the title to the paper or its pro- ceeds, and that the indorser is still the owner of the paper and its proceeds. Hence a correspondent bank receiving paper so indorsed cannot retain the proceeds on an indebtedness of the sending bank, to the prejudice of the original indorser.^^ And no agreement between the initial and correspondent banks, nor any method of bookkeeping or of charging and crediting accounts 58 See cases cited in notes 59-63, infra. 59 Evansville Bank v. German-American Banli, 155 U. S. 556, 562, 15 Sup. Ct. 221; FifttL Nat. Bank v. Armstrong, 40 Fed. 46; Com- m^ercial Nat. Bank of Cincinnati v. Hamilton Nat. Bank of Ft. Wayne, 42 Fed. 880; Bank of Metropolis v. First Nat. Bank of Jersey City, 19 Fed. 503; Sweeny v. Easter, 1 Wall. (U. S.) 166, 173; Blaine v. Bourne, 11 R. I. 119; Ttird Nat. Bank of Syracuse v. Clark, 23 Minn. 263; Merchants' Nat. Bank of St. Paul v. Hanson, 33 Minn. 40; National Bank of Commerce of Seattle v. Johnson, 6 N. D. 180, 69 N. W. 49; People's Bank of Lewisburg v. Jefferson County Sav. Bank, 106 Ala. 524, 17 So. 728; Northwestern Nat. Bank of Chicago v. Bank of Commerce of Kansas City, 107 Mo. 402, 17 S. W. 982, 15 L. R. A. 102; Mechanics* Bank v. Valley Packing Co., 70 Mo. 643, 4 Mo. App. 200; National Park Bank v. Seaboard Bank, 114 N. Y. 28, 20 N. E. 632, 11 Am. St. Rep. 612; Naser V. First Nat. Bank, 116 N. Y. 492, 22 N. B. 1077; Cecil Bank v. Farmers' Bank of Maryland, 22 Md. 148; Claflin v. Wilson, 51 Iowa, 15, 50 N. W. 578; Hoffman v. First Nat. Bank of Jersey City) 46 N. J. Law, 604; First Nat. Bank of Crown Point v. First Nat. Bank of Richmond, 76 Ind. 561; Manufacturers' Nat. Bank v. Con- tinental Bank, 148 Mass. 553, 20 N. E. 193; Sutherland v. First Nat. Bank of Ypsilanti, 31 Mich. 230; Boy kin v. Bank of Fayette- (220) Ch. 7J RIGHTS AND LIABILITIES. § 144 among themselves, can prejudice the rights or title of the true owner of the paper, if he had indorsed it re- strictively for collection in the first instance.^" So, where the indorsement to the initial hank, which has become insolvent, was an unambiguous one for collection, the correspondent cannot retain the proceeds collected be- fore notice of insolvency for a debt due it from the initial bank, as against the owner, though it had notified the initial bank of the collection, and had given it credit on the books of the bank.^^ And where the paper was originally indorsed for collection, the correspondent bank is not discharged from liability to the owner, on the insolvency of the initial bank, by having credited the amount to such bank, where no cash was paid to the initial bank, and the credit entry could be negatived by ville, 118 N. C. 566, 24 S. B. 357; National Citizens' Bank of New- York V. Citizens' Nat. Bank, 119 N. C. 307, 25 S. E3. 971; People's Bank of New York v. Citizens' Nat. Bank, 119 N. C. 310, 25 S. B. 1023. • 60 National Citizens' Bank of New York v. Citizens' Nat. Bank, 119 N. C. 307, 25 S. E. 971; Boykin v. Bank of Fayetteville, 118 N. C. 566, 24 S. B. 357; Stevenson v. Fidelity Bank, 113 N. C. 485, 18 S. E. 695; People's Bank of Lewisburg v. Jefferson County Sav. Bank, 106 Ala. 524, 17 So. 728, distinguishing Commercial Bank of Pennsylvania v. Armstrong, 148 U. S. 50, 13 Sup. Ct. 533; Hackett V. Reynolds, 114 Pa. St. 328, 6 Atl. 689; Evansville Bank v. German- American Bank, 155 V. S. 556, 15 Sup. Ct. 221; Commercial Nat. Bank of Cincinnati v. Hamilton Nat. Bank of Ft. Wayne, 42 Fed. 880; Bank of Metropolis v. First Nat. Bank of Jersey City, 19 Fed. 303; Blaine v. Bourne, 11 R. I. 119; Arnold v. Clark, 3 N. Y. Super. Ct. 491; Lawrence v. Stonington Bank, 6 Conn. 521. ei People's Bank of Lewisburg v. Jefferson County Sav. Bank, 106 Ala. 524, 17 So. 728. In this case the initial hank had not cred- ited the proceeds to the account of the owner prior to its insol- vency nor subsequently. (221) § 144 BANK COLLECTIONS. [Oh. 7 a counter entry with a notice to the initial bank that the money had been paid to the owner.®^ So, also, where the last of a series of corresponding banks receives and enters on its books, for collection only, a draft Avhich had been restrictively indorsed for collec- tion by each of the prior transmitting banks, it cannot, in reliance on the draft as security, make payment to its immediate indorser, and then, on the latter bank's suspension, recover the amount of the advances from the owner of the draft, who had stopped payment before it matured.^^ The fact that the correspondent had credited the pro- ceeds of paper originally indorsed for collection to the sending bank, which in turn credited the owner, and that, imder an arrangement with the sending bank, the correspondent had ordered a third bank, a creditor of the sending bank, to credit the owner Avith the amount, will not relieve the correspondent from liability to the owner for the proceeds, the sending bank being insol- vent, where it appears that there was sufl&cient time after the failure of the sending bank for the correspond- ent to have countermanded its order to such third bank, but the order was not countermanded.®* In Texas it has been held broadly that, if the owner indorses for collection to the initial bank, the corre- spondent bank holds the proceeds in trust for the owner, and cannot apply it to any indebtedness due it from the 62 Boykin v. Bank of Payetteville, 118 N. C. 566, 24 S. E. 357. 63 Freeman's Nat. Bank v. National Tube Works Co., 151 Mass. 413, 24 N. E. 779, 21 Am. St. Rep. 461, 8 L. R. A. 42, and cases cited. oi Commercial Nat. Bank of Cincinnati v. Hamilton Nat. Bank of Ft. Wayne, 42 Fed. 880. (222) <;;il. 7] RIGHTS AND LIABILITIES. § 145 initial bank, regardless of the question of notice of its insolvency.^® Where, in addition to an original indorsement for collection, the paper, when transmitted to the corre- spondent, is accompanied by a letter of advice, also negativing any title in the sending bank, the correspond- ent is doubly notified as to the ownership, and cannot claim title to the paper or a lien on the paper or its proceeds for a debt of the sending bank.^'' § 145. Proceeds of paper originally indorsed in blank. Where the paper was originally indorsed in blank to the initial bank, and by it indorsed to its correspondent for collection, the latter, having no notice from the pa- per itself, or otherwise, that it did not belong to the initial bank, niaj' retain the proceeds for a general bal- ance of account against the initial bank, where there had been mutual dealings and customs of long standing between the banks, whereby collections were credited and debited currently, and statements of account and balances were periodically exchanged.'^'^ An indorse- ment in blank to the first bank, coupled with such mu- ss City Bank of Sherman v. Weiss, 67 Tex. 331, 3 S. W. 299. 86 Williams v. Jones, 77 Ala. 294, and cases cited; Lawrence v. Stonington Bank, 6 Conn. 521; People's Bank of Lewisburg v. Jef- ferson County Sav. Bank, 106 Ala. 524, 17 So. 728; First Nat. Bank of Circleville v. Bank of Monroe, 33 Fed. 408. In the last case just cited, the indorsement was "for collection," and the instructions were to "collect and credit proceeds." In the Alabama case above cited, the indorsement was "for account of," and the Instructions were for "collection and credit." e^ Vickrey v. State Savings Ass'n, 21 Fed. 773 ; Cody v. City Nat. Bank of Grand Rapids, 55 Mich. 379; Doppelt v. National Bank (223) § 145 BANK COLLECTIONS. [( h. 1' tual dealings between the two banks, will also authorize the correspondent to credit the proceeds absolutely to the sending bank, and allow it to draw out the fund, in which case it will not be liable therefor to the payee of the paper in case of the insolvency of the sending bank.^^ Under such circumstances, if money was actually ad- vanced by the correspondent bank on the faith of the paper as the property of the initial bank, the paper must be considered as the property of such initial bank, so that trover would not lie against the correspondent by the owner.^® A bank receiving from a correspondent bank, in due course, a check indorsed in blank, and in good faith parting with value therefor, or giving an extension on an existing debt by reason thereof, is entitled to the pro- ceeds as against the owner, though actual collection was not made until after the failure of the sending bankJ" (B) Enforcing Preference or Establishing Trust. By the great weight of authority, the mere collection of the proceeds and the giving of credit therefor does not establish a trust. The bank becomes merely a debtor for the amount col- lected. Fraudulent conversion does not per se establish a trust or give a right to a preference; but some courts hold that if the of RepuWic, 175 111. 432, 51 N. B. 753, affirming 74 111. App. 429. Contra, see First Nat. Bank of Meridian v. Strauss, 66 Miss. 479, 6 So. 232. i^sDoppelt V. National Bank of Republic, 175 111. 432, 51 N. B. 753, affirming 74 111. App. 429. es Cody v. City Nat. Bank of Grand Rapids, 55 Mich. 379. TO Winfield Nat. Bank v. McWilliams, 9 Okla. 493, 60 Pac. 229. (224) Ch. 7] RIGHTS AND LIABILITIES. g 145 paper was received when the bank was insolvent within the knowledge of its officers, the proceeds are a trust fund. Where remittance was made by a draft or check of the collect- ing bank, and the drawer or drawee bank became insolvent be- fore such paper was paid, it is the rule in some jurisdictions that a trust is impressed on the assets of the insolvent bank for the amount of the collection; in other jurisdictions, no trust arises in such a case. But if the bank was expressly author- ized to send its check or draft in payment, and failed after doing so, and the paper was not paid, no trust arises. If, however, the proceeds never came into the possession of the bank, its assets cannot be impressed with a trust therefor; nor can they be so impressed if the proceeds were disposed of before insolvency. But the proceeds of paper paid to the assignee or receiver of the bank after its insolvency form a special trust fund recoverable in full. The proceeds once determined to be a trust fund niay be fol- lowed into the insolvent estate if they can be traced into the assets, or identified as forming part of the assets. The mere mingling of the proceeds with the other funds of the collect- ing bank will not defeat the trust. The right to a trust or preference is not lost or waived by ° the mere filing of a claim as a general creditor, but is waived by proceeding for, and obtaining, an actual adjudication on the claim as a general claim. § 146. In general. In a leading English case it is laid down broadly that, if a fiduciary relation exists, 'the equitable right to fol- low funds or property left with the fiduciary in that capacity exists, whether his exact status be that of agent, bailee, or trustee.'^^ This rule has been followed con- TiKnatchbulI v. Hallett, 13 Ch. Div. 696. (225) 16 § 146 BANK COLLECTIONS. [Qh. 7 sistently in England, and the case is a recognized au- thority in America. But we have found that the great weight of authority is to the effect that on the mere collection of the proceeds and the giving of credit there- for, the relation becomes that of creditor and debtor.''^ This being so, it precludes the possibility of treating the bank as a fiduciary having the status either of an agent, a bailee, or a trustee, except under special condi- tions, which will be considered in the remaining sec- tions of this chapter. Nevertheless, the doctrine that, as soon as the proceeds are collected in cash and credited to the owner, the bank becomes a debtor to the owner for the amount, has been extended by some courts, which take the position that the bank then becomes a trustee for the owner, and not merely a simple debtor.^^ As a result of this enlarged doctrine, neither the paper nor its proceeds is an asset of the bank; consequently, neither passes by a general assignment of the bank, and the trust may be enforced against a receiver or assignee, and the amount recovered in full.'^* In any case, the 72 See ante, § 121. See, also, post, §§ 150-154. T3 Jones V. Kilbreth, 49 Ohio St. 401, 31 N. B. 346; State v. Bank of Commerce of Grand Island (Neb.) 85 N. W. 43; Anheuser- Busch Brewing Ass'n v. Morris, 36 Neb. 31, 53 N. W. 1037; Nurse V. Satterlee, 81 Iowa, 491, 46 N. W. 1102; Louisiana Ice Co. v. State Nat. Bank of New Orleans, 1 McGloin (La.) 181; City Bank of Sherman v. Weiss, 67 Tex. 331, 3 S. W. 299. Where a bank to which a mortgage was sent for collection and remittance of the proceeds failed to remit, the sender may pursue the proceeds as a trust fund in the hands of a receiver of the bank. Wallace v. Stone, 107 Mich. 190, 65 N. W. 113. A trust also arises where the paper was sent "for collection and returns." Continental Nat. Bank of New York v. Weems, 69 Tex. 489, 495. T4 Louisiana Ice Co. v. State Nat. Bank of New Orleans, 1 Mc- (226) <3h. 7] RIGHTS AND LIABILITIES. § 147 burden of establishing a trust is on the party seeking to recover the funds in full, and he must establish a clear case.''^ § 147. Fraudulent conversion as creating preference or trust. We again encounter a conflict of authority on the question whether a fraudulent conversion by the bank, arising from the fact that it received the paper for col- lection when it was insolvent within the knowledge of its officers, or from the fact that it was otherwise guilty of a conversion of the paper or its proceeds, creates a trust or a right to preference. In the federal courts and some of the state courts the rule is that a trust, and a consequent right of preference, arises from the fraud of the bank in receiving the paper knowing itself to be hopelessly insolvent.''® Consistently with this rule, it Gloin (La.) 181; Griffin v. Chase, 36 Neb. 328, 54 N. W. 572; Anheuser-Busch Brewing Ass'n v. Morris, 36 Net. 31, 53 N. W. 1037; Nurse v. Satterlee, 81 Iowa, 491, 46 N. W. 1102; Farmers' .& Mechanics' Nat. Bank v. King, 57 Pa. St. 202; Peak v. Bllicott, 30 Kan. 156, 1 Pac. 499. 75 In re Bank of Madison, 5 Biss. 515, Fed. Gas. No. 890. '6 St. Louis & San Francisco Ry. Go. v. Johnston, 133 U. S. 566, 10 Sup. Gt. 390, 33 L. Ed. 683; City of Philadelphia v. Eckels, 98 Fed. 485; Importers' & Traders' Bank v. Peters, 123 N. Y. 272, 278, 25 N. E. 319, affirming 51 Hun, 640; Harrison v. Smith, 83 Mo. 210; German Fire Ins. Go. v. Kimhle, 66 Mo. App. 370. Money was deposited in a national bank by a city treasurer merely for safe keeping over night, under an arrangement with the bank that the part of the money belonging to the city should ■be separated from state funds the next morning, and credit given, to the city. Credit was so given the next morning before bank- ing hours, at a time when the bank was in the hands of the bank examiner under orders from the comptroller. The officers knew at the time the deposit was received, and the credit entered, that (227) § 147 BANK COLLECTIONS. [Ch. 7 has been held that an allegation in a petition to re- cover the proceeds as a trust fund that the bank re- ceived the paper as bailee, for collection, is not in- consistent with an allegation that the deposit of the paper was obtained by a fraudulent concealment of the insolvency of the bank, and a prayer for rescission of the contract.''^ On the other hand, other courts hold that, on the col- lection of the paper and the actual mingling of the pro- ceeds with other funds of the collecting bank, the rela- tion of creditor and debtor arises, so that the creditor is entitled to no preference, though the bank was in- solvent, within the knowledge of its officers, when it re- ceived the paper, and failed after collection and before remittance."^* A parallel holding is that the right to follow trust funds is a property right, not based on the theory of fraudulent conversion, and that a fraudulent conversion does not establish a trust.^^ Between these the bank was insolvent. Held, that the funds never became the property of the bank, and were recoverable in full from a re- ceiver of the bank. City of Philadelphia v. Eckels, 98 Fed. 485. 77Higgins V. Hayden, 53 Neb. 61, 73 N. W. 280; St. Louis & San Francisco Ry. Co. v. Johnston, 133 U. S. 566. 's Commercial & Farmers' Nat. Bank of Baltimore v. Davis, 115 N. C. 226, 20 S. E. 370; Thuemmler v. Barth, 89 Wis. 381, 62 N. W. 94; Blake v. State Sav. Bank, 12 Wash. 619, 41 Pac. 909; Bruner v. First Nat. Bank of Johnson City, 97 Tenn. 540, 37 S. W. 286; Sayles v. Cox, 95 Terin. 579; Akin v. Jones, 93 Tenn. 353. 79 Slater v. Oriental Mills, 18 R. I. 352, 27 Atl. 433; Nonotuek Silk Co. V. Flanders, 87 Wis. 237, 58 N. W. 383; Cavin v. Gleason, 105 N. Y. 256, 260; Bank of Florence v. United States Savings & Loan Co., 104 Ala. 297, 16 So. 110; In re Seven Corners Bank, 58 Minn. 5, 59 N. W. 633. See, also, Illinois Trust & Savings Bank of Chicago v. First (228) Ch. 7] RIGHTS AND LIABILITIES. § 148 two lines of authority there seems to be no compromise, or intermediate position. It therefore becomes a ques- tion merely of choosing "whom ye shall serve." § 148. Remittance made by draft or check — Drawer or drawee bank Insolvent. The diversity of judicial opinion on the question of the existence of a trust, or the right to a preference in the proceeds of a collection, is further illustrated by the cases which pass on the right to a preference or the existence of a trust where remittance was made by draft or check, and the drawer or drawee bank failed before such paper was paid. The supreme court of Mississippi holds that, where a collecting bank takes, in payment of a note, a check on itself, drawn by one having suffi- cient funds in the bank to pay the check, debits his ac- count with the amount, remits by its own check, and thereafter fails, the owner of the note is not entitled to preference or priority in the distribution of the assets.^" Nat. Bank of Buffalo, 15 Fed. 858; Philadelphia Nat. Bank v. Dowd, 38 Fed. 172, 2 L. R. A. 480. The debt being, then, a simple contract debt, complainant has an adequate remedy at law. In re Seven Corners Bank, 58 Minn. 5, 59 N. W. 633; Crothers v. Lee, 29 Ala. 337. 80 Billingsley v. Pollock, 69 Miss. 759, 13 So. 828, 30 Am. St. Rep. 585. The court in this case, while reaflSrming the doctrines laid down in Ryan v. Paine, 66 Miss. 678, 6 So. 320, and Kinney V. Paine, 68 Miss. 258, 8 So. 747 (considered later in this sec- tion of the text), refuses to extend the "trust" theory to the case at bar, remarking that, "wherever there is a trust, it may be enforced as such, but calling one sort of claim a trust merely to place it on a better footing is not allowable. It has been done in some instances, where hard cases have made bad prece- dents, which we will not follow." (229) 8 148 BANK COLLECTIONS. [Ch. 7 To the same effect is a Pennsylvania decision that, where the account of the drawee of a draft indorsed to a bank for collection was charged with the amount, and a draft given therefor by the bank, which failed before its draft was presented for payment, no special lien or priority arises ; it appearing that the bank did not re- ceive any money as the proceeds of the collection, and that no part of the funds of the bank had been set apart to pay the amount of the collection.®^ The rule is the same where the bank had authority to remit by check or draft, or its action in so doing was ratified by the owner. Thus, where the collecting bank was directed to send New York exchange in payment of a collection, it was thereby ordered not to send the spe- cific money collected, and was authorized to use the money and to send a check on a New York bank for the amount collected; so that, in case of the insolvency of the collecting bank, and the dishonor of the check, the owner of the collection is a general creditor only and no trust relation arises.®^ So, also, where a collecting bank issued its own draft for the amount of a collection, and the draft was accept- ed by the owners of the collection, and was, in turn, forwarded for collection, but was not paid because of the suspension of the bank, no trust arises, but the re- lation of the parties is simply that of debtor and cred- itor.®^ The same rule holds where remittance by check or draft is justified by general custom;®* 81 Freiberg v. Stoddard, 161 Pa. St. 259, 28 Atl. 1111. 82 Akin V. Jones, 93 Tenn. 353, 27 S. W. 669, 42 Am. St. Rep. 921, 25 L. R. A. 523. S3 Bowman v. First Nat. Bank of Spokane, 9 Wash. 614, 38 Pac. 211, 43 Am. St. Rep. 870. siHallam v. Tillinghast, 19 Wash. 20, 52 Pac. 329. (230) Oh. 7] RIGHTS AND LIABILITIES. § 149 There are some cases, however, holding broadly that a bank which remitted by a draft on another bank, which failed before the draft Avas paid, holds the pro- ceeds of the collection as a trust fund for the owner.*^ Where the drawer, whose account was overdrawn, gave a check in payment of the draft, and the drawee bank failed after sending a draft for the amount to the collecting bank, the latter may enforce a trust in the debt due by such drawer as against the parties to a con- sent decree made in a suit to settle priorities between creditors of the drawee bank; the collecting bank not having been a party to that suit.^® § 149. Refusal to pay customer's check does not give prefer- ence. The mere refusal of a bank to pay a customer's check does not give any right of preference. So, where the drawee bank, to which a check was sent by the collect- ing bank with directions to apply the proceeds on a debt due from the collecting bank, failed before comply- ing with such directions, the drawer, on the refusal of the drawee to pay the check out of his funds, and after payment by him of the check, has a right of action on the check against the drawee bank, but no right to pri- es Poster V. Rincker, 4 Wyo. 484, 35 Pac. 470; People v. Bank of Dansville, 39 Hun (N. Y.) 187. 86 Kinney v. Paine, 68 Miss. 258, 8 So. 747. The parties to such suit cannot be considered as bona fide purchasers of the debt of the drawer, which was merely a book account. Id. The fact that the drawer's account was overdrawn distinguishes this case from Billingsley v. Pollock, 69 Miss. 759, previously con- sidered in this section. (231) § 150 BANK COLLECTIONS. [Oh. 7 ority in the distribution of the assets of such bank on its insolvency.®'^ § 150, Tracing and following proceeds into insolvent estate of collecting bank. The old theory that trust money mingled with other money cannot be followed as a trust fund because money has no ear-marks^® has been thoroughly supplanted by the more modern equity doctrine, first definitely an- nounced by Lord Justice Knight Bruce in Pennell v. Deffell,88 and later followed in Frith v. Cartlandj^" and in, the great case of Knatchbull v. Hallett,^^ that equity will follow trust money, though mingled with other moneys or changed, transformed, or substituted, so long as the money in its original or substituted form can be traced, and that the right to follow ceases only when the means of ascertainment fail. In the last case above mentioned Sir George Jessel, M. E., says: "If the bailee sells the goods bailed, the bailor can in equity follow the proceeds, and can follow the proceeds wherever they can be distinguished, either being actually kept separate, or being mixed up with other moneys. I have only to advert to one other point, and that is this: Supposing * * * the moneys were simply mixed with other moneys of the trustee, sTRomanski v. Thompson (Miss.) 11 So. 828. ssDeg V. Deg, 2 P. Wms. 414; Whitecomb v. Jacob, 1 Salk. 161; Ryall V. RoUe, 1 Atk. 165; Ex parte Sayers, 5 Ves. 169; Taylor V. Plumer, 3 Maule & S. 562. 80 4 De Gex, M. & G. 372. 00 2 Hem. & M. 417. See also. Ex parte Cooke, 4 Ch. Dlv. 123. 91 13 Ch. Div. 696, where the earlier cases are thoroughly dis- cussed. (232) •Ch. 7] RIGHTS AND LIABILITIES. § 150 using the term again in its full sense as including every person in a fiduciary relation, does it make any differ- ence, according to the modern doctrine of equity? I say none. It would be very remarkable if it were to do so." This doctrine has been very generally adopted in de- termining the right to follow the proceeds of a collec- tion made by or through a bank which became insolvent after collection, and before remittance.^^ The right to follow as a trust fund, and recover in full, the proceeds of a collection, is usually sustained if the proceeds can be traced to any particular fund in the hands of the as- signee or receiver,^^ though the identity of the particu- 82 Commercial & Farmers' Nat. Bank of Baltimore v. Davis, 115 N. C. 226, 20 S. E. 370; Freiberg v. Stoddard, 161 Pa. St. 259,. 28 Atl. 1111; In re Seven Corners Bank, 58 Minn. 5, 59 N. W. 633; Westfall v. Mullen, Id.; Little v. Chadwick, 151 Mass. 109; Edson V. Angell, 58 Mich. 336, 25 N. W. 307; Sherwood v. Milford State Bank, 94 Mich. 78, 53 N. W. 923; In re Waterbury, Id.; Midland Nat. Bank of Kansas City v. Brightwell, 148 Mo. 358, ■49 S. W. 994; Gavin v. Gleason, 105 N. Y. 256, 11 N. E. 504; Atkinson v. Rochester Printing Co., 114 N. Y. 168, 21 N. B. 178; Holmes v. Gilman, 138 N. Y. 376, 34 N. E. 205; Foster v. Riiicker, 4 Wyo. 484, 35 Pac. 470; Philadelphia Nat. Bank v. Dowd, 38 Fed. 172, 2 L. R. A. 480; Illinois Trust & Savings Bank of Chicago v. First Nat. Bank of Buffalo, 15 Fed. 858, citing Kip v. Bank of New York, 10 Johns. (N. Y.) 63; Kansas State Bank v. First State Bank of Marion (Kan. Sup.) 64 Pac. 634. 93 Nurse V. Satterlee, 81 Iowa, 491, 46 N. W. 1102, citing Inde- pendent District of Boyer v. King, 80 Iowa, 497, 45 N. W. 908, -and Davenport Plow Co. v. Lamp, 80 Iowa, 722, 45 N. W. 1049. Where the fund is actually in the hands of the receiver, the creditor need not sue in equity to establish his rights, but may make summary application by petition. People v. Bank of D'ans- -Tille, 39 Hun, 187; In re Le Blanc, 14 Hun, 8. (233) § 150 BANK COLLECTIONS. [(_;;ll. 7 lar money is lost.^* And it is the rule in some jurisdic- tions that the proceeds form a trust fund recoverable in full, though they cannot be specifically traced to any particular fund, if they can be traced generally to the insolvent estate.*^ Further enlarging the doctrines of equity, the courts of Missouri hold that the proceeds of a collection made by a bank immediately before, and in its possession at the time of, its assignment, form a trust which is im- pressed on all the assets, and entitles the owner to a preference, though such proceeds never came into the hands of the assignee, either in their' original or in a substituted form.^" The position of the Missouri courts is that, "to an amount thus wrongfully converted, the as- signee can lay no claim in equity, and that the wrongful conversion immediately preceding the assignment is of itself evidence of a corresponding increase in the as- siCavin v. Gleason, 105 N. Y. 256, 11 N. B. 504; White v. Com- mercial & Farmers' Bank of Rockhill (S. C.) 38 S. E. 453. 85 Gavin v. Gleason, 105 N. Y. 256; Freiberg v. Stoddard, 161 Pa. St. 259, 28 Atl. 1111; In re Seven Corners Bank, 58 Minn. 5,. 59 N. W. 633; Westfall v. Mullen, Id.; Nonotuck Silk Co. v. Flanders, 87 Wis. 237, 58 N. W. 383 (overruling McLeod v. Evans, 66 Wis. 401, 28 N. W. 173, 214, and Francis v. Evans, 69 Wis. 115, 33 N. W. 93; Bowman v. Evans, 71 Wis. 133, 36 N. W. 629); Sherwood v. Milford State Bank, 94 Mich. 78, 53 N. W. 923; In re Waterbury, Id.; Peak v. EUicott, 30 Kan. 156, 1 Pac. 499, See, also. Central Nat. Bank of Baltimore v. Connecticut Mutual Life- Ins. Co., 104 U. S. 54; Van Alen v. American Nat. Bank, 52 N. Y. 1; People v. City Bank of Rochester, 96 N. Y. 32; Farmers'" & Mechanics' Nat. Baak v. King, 57 Pa. St. 202. 9s First Nat. Bank of Lapeer v. Sanford, 62 Mo. App. 394, fol- lowing Harrison v. Smith, 83 Mo. 210. (234) Ch. 7] RIGHTS AND LIABILITIES. § 150 signed assets."^'' This position is believed to be an un- warranted enlargement of the general rules of equity- relating to trusts and the following of trust funds. It is also obnoxious to the doctrine that the right to a pref- erence or to follow the proceeds as a trust is not based on mere conversion of the proceeds.^^ The position of the Missouri courts is also considered later in treating of the right to follow, as a trust fund, proceeds which have been disposed of by the bank before insolvency.®* There is some difference of judicial opinion as to the effect of mingling the proceeds with other funds of the bank. The better rule, following the general principles of equity considered above, is that such a mingling of the proceeds will not prevent the enforcement of a pref- erence or trust, if it can be shown that the proceeds came into the hands of the receiver along with the other funds.^"" Indeed, many courts assert squarely that the fact of mingling the proceeds of the collection with the general funds of the bank itself establishes a trust and a right to priority.^"^ But if the funds arising from the collection have become so mingled with other funds 97 First Nat. Bank of Lapeer v. Sanford, 62 Mo. App. 394; Har- rison V. Smith, 83 Mo. 210. 98 See ante, § 147. 99 See post, § 153. 100 Thompson v. Gloucester City Savings Inst. (N. J. Ch.) 8 Atl. 97; Hoffman v. First Nat. Bank of Jersey City, 46 N. J. Law, 604; First Nat. Bank of Montgomery v. Armstrong, 36 Fed. 59. Where the trust money has heen mingled by the bank with its own funds, a payment from the combined fund will be pre- sumed to have come from the funds of the bank, and not from the trust fund. State v. Bank of Commerce of Grand Island (Neb.) 85 N. W. 43; Continental Nat. Bank of New York v. Weems, 69 Tex. 489. 101 AVindstanley v. Second Nat. Bank of Louisville, 13 Ind. App. (235) § 150 BANK COLLECTIONS. [Ch. 7 that it is impossible to trace or identify them as form- ing a part of the fund sought to be charged, they lose their trust and preferential character.^''^ However, the mere fact that a subagent of the corre- spondent bank had collected paper sent for collection to the correspondent, which had failed, does not amount to such a commingling of the funds with the general funds of the correspondent bank as will deprive the funds of their trust character.!"^ So, too, where the collecting bank received the check of the drawee on an- other bank in payment of the collection, and the check was collected through the clearing house, and a memo- 544, 41 N. E. 956; German Fire Ins. Co. v. Kimble, 66 Mo. App. 370; Ryan v. Phillips, 3 Kan. App. 704, 44 Pac. 909. 102 Little V. Chadwlck, 151 Mass. 110, 23 N. E. 1005; Bnglar V. Offutt, 70. Md. 78, 16 Atl. 497; Goqdell v. Buck, 67 Me. 514; Thompson's Appeal, 22 Pa. St. 16; Columbian Bank's Estate, 147 Pa. St. 422, 23 Atl. 625, 626, 628; Van Alen v. American Nat. Bank, 52 N. Y. 1; Holmes v. Oilman, 138 N. Y. 369, 34 N. B. 205; Union Nat. Bank of Chicago v. Goetz, 138 111. 127, 27 N. E. 907; Neely v. Rood, 54 Mich. 134, 19 N. V?. 920; Sherwood v. Milford State Bank, 94 Mich. 78, 53 N. W. 923; Wallace v. Stone, 107 Mich. 190, 65 N. W. 113; Central Nat. Bank of Baltimore v. In- surance Co., 104 U. S. 54, 68; Peters v. Bain, 133 U. S. 670, 693, 10 Sup. Ct. 354; Illinois Trust & Savings Bank of Chicago v. First Nat. Bank of Buffalo, 15 Fed. 858; 2 Story, Eq. Jur. §§ 1258, 1259; 2 Pomeroy, Eq. Jur. § 1058; 1' Lewin, Trusts (1 Am. Ed.) 241. Contra, see Ryan v. Phillips, 3 Kan. App. 704, 44 Pac. 909. 103 Commercial Bank of Pennsylvania v. Armstrong, 148 TJ. S. 50, 13 Sup. Ct. 533, 37 L. Ed. 363; Armstrong v. Commercial Bank of Pennsylvania, Id., affirming 39 Fed. 684. If the corre- spondent in such case was indebted to its subagent, and, on col- lection by the latter, the former was credited with the amount, the proceeds of the collection were thereby brought into the possession of the correspondent. Id. (236) Oh. 7] RIGHTS AND LIABILITIES. g 151 randum placed with the bank's cash, indicating that the proceeds of the collection were the property of the sender, there was not such a mingling of the proceeds with the general funds as to destroy the trust and pref- erential character of the proceeds.^"* JMoney received by a bank for the express purpose of transmitting the same to the owner of a note, in order to take it up, and immediately mingled with its general funds, becomes, on the subsequent failure of the bank without having transmitted it, a trust fund recoverable in full from the assignee of the bank, though not specif- ically traceable to the funds in his hands.^"^ Where the initial bank becomes insolvent after the collection has been made by its correspondent, and the proceeds mingled with the general fund, but, before insolvency, the correspondent had remitted some of the proceeds of its collections generally, and, after insol- vency, had remitted to the assignee part of the funds re- maining in its hands as the proceeds of all collections made for the insolvent bank, the owner has no specific lien on, or preference in, the funds in the hands of the assignee.^"* § 151. Proceeds never in possession of bank. Where the proceeds were never actually realized by the collecting bank, as where the bank, instead of col- 104 First Nat. Bank of Montgomery v. Armstrong, 36 Fed". 59. In this case the court says: "The old idea that, because money has no earmarks, it cannot be followed when mingled with the funds of a wrongdoer, has long since been exploded." 105 Ryan V. Phillips, 3 Kan. App. 704, 44 Pac. 909. 106 Reeves v. State Bank, 8 Ohio St. 465, 483. (23'7) § 151 BANK COLLECTIONS. [Ch. 7 lecting, took a new note to itself from the obligor, the owner cannot, on the failure of the bank, recover the amount of the note as a trust fund from the assignee of the bank, though he might recover the note itself.^"^ So, too, where a draft was received for "collection and return," and the bank took the check of the debtor, one of its depositors, and merely charged the amount to him and credited the account of the drawer, without separating the amount from other funds of the bank, no trust arose which would create a preference in case of the bank's insolvency.^"® Even the supreme court of Missouri, which has gone as far as any other court in extending the equitable doctrines as to following trust funds, denied a prefer- ence to the initial collecting bank in the assets of its in- solvent correspondent, where the latter had received no money in payment, but had accepted payment partly by a draft of another bank, which since became insolvent before paying the draft, and partly by charging the ac- count of its depositors; on the ground that the assets of the correspondent bank had in no wise been augment- ed by the collection.^ °^ It goes almost without saying that a bank is not liable as trustee for money collected by its president as a trus- tee, and paid into the bank on a certificate of deposit in 107 Harrison Nat. Bank of Cadiz v. EUicott, 31 Kan. 173, 1 Pac. 593, citing People v. Merchants' & Mechanics' Bank, 78 N. Y. 269, 34 Am. Rep. 532; Morse, Banks & Banking, 384 et seq. 108 Anheuser-Busch Brewing Ass'n v. Clayton, 6 C. C. A. 108, 56 Fed. 759, 13 U. S. App. 295. But see Continental Nat. Bank ot New York v. Weems, 69 Tex. 489. 109 Midland Nat. Bank of Kansas City v. Brightwell, 148 Mo. 358. (238) Ch. 7] RIGHTS AND LIABILITIES. § 153 his name, where the bank was in no way connected with the trust."" § 152. Amount of note against customer charged to his account before insolvency of bank. The mere charging of the amount of the paper to the account of a customer, which is sufficient to pay it, and the return of the paper to him, is not such a specific ap- propriation of any part of the funds of the bank to the payment of the debt as will create a trust in the assets of the bank on its insolvency.^^^ But it has been held that, where a bank receiving for collection, from one not a customer of the bank, a note made by one of its de- positors, charges the amount thereof to the account of the maker, Avho has at that time sufficient funds in the bank to meet it, the bank holds the amount of the col- lection in trust for the owner of the note, and he may recover in full from its receiver.^^^ § 153. Proceeds disposed of before insolvency. The extreme limit of the extension of the equitable doctrines as to following the proceeds of a collection as a trust fund is exemplified in the cases holding that the beneficiary — that is, the owner — is entitled to prefer- no Alpena Nat. Bank v. Greenbaum, 80 Mich. 1, 44 N. W. 1123. m People V. Merchants' & Mechanics' Bank, 78 N. Y. 269, 34 Am. Rep. 532; Anheuser-Busch Brewing Ass'n v. Clayton, 6 C. C. A. 108, 56 Fed. 759, 13 V. S. App. 295; Billingsley v. Pollock, 69 Miss. 759, 13 So. 828, 30 Am. St. Rep. 585; Freiberg v. Stod- dard, 161 Pa. St. 259, 28 Atl. 1111; Midland Nat. Bank of Kansas City V. Brightwell, 148 Mo. 358, 49 S. W. 994. 112 people V. Merchants' Bank of Binghamton, 92 Hun, 159, 36 N. Y. Supp. 989; Arnot v. Bingham, 55 Hun, 553, 9 N. Y. Supp. 68. (239) § 153 BANK COLLECTIONS. [Ch. 7 ence, though the insolvent had exhausted such proceeds in paying its own debts, and consequently the proceeds never entered into the estate of the insolvent, nor form- ed part of the assets.^ ^^ The better rule is that the funds must be traced into the hands of the receiver or assignee, and that, if they have been used up by the bank prior to its failure and the appointment of the assignee or re- ceiver, no trust or preference can be enforced.^ ^* In harmony with this latter rule, it has been held that, where no specific instructions were given as to the disposition of the proceeds, and thfey were mingled with the other funds of the collecting bank, and credited to the sending bank, and drawn against, the sending bank is an ordinary creditor, and not entitled to preference lis First Nat. Bank o£ Lapeer v. Sanford, 62 Mo. App. 394; Harrison v. Smith, 83 Mo. 210; Davenport Plow Co. v. Lamp, 80 Iowa, 722, 45 N. W. 1049; McLeod v. Evans, 66 Wis. 401, 28 N. W. 173; Francis v. Evans, 69 Wis. 115, 33 N. W. 93. The two cases last cited were overruled in Nonotuck Silk Co. V. Flanders, 87 Wis. 237, 58 N. W. 383. The Iowa case above cited was severely criticised in Slater v. Oriental Mills, 18 R. I. 352, 27 Atl. 443, for making no distinc- tion between funds remaining in the estate, and going to swell the assets, and funds that have been dissipated, and do not go to swell the assets. The supreme court of Missouri expressly admits that it is some- what in advance of the doctrines of the English chancery courts, and of most of the courts of the various states of the Union. See Midland Nat. Bank of Kansas City v. Brightwell, 148 Mo. 358, 49 S. W. 994. 114 Frank v. Bingham, 58 Hun, 580, 12 N. Y. Supp. 767; Bruner V. First Nat. Bank of Johnson City, 97 Tenn. 540, 37 S. W. 286; Thuemmler v. Barth, 89 Wis. 381, 62 N. W. 94; In re Seven Cor- ners Bank, 58 Minn. 5, 59 N. W. 633; Westfall v. Mullen, Id. (240) Ch. 7] BIGHTS AND LIABILITIES. § 154 in case of the insolvency of the collecting taank.^^^ The same rule applies where a check deposited in a bank for collection is sent to the clearing house, and there used up in liquidating the balance due the clearing house from the collecting bank on that day's business, and the owner is not entitled to a preference in case the collect- ing bank becomes insolvent on the same day, though the assignee received from the clearing house, in the bank's general account, more than enough to pay the check.^^^ Nor is the receiver of a bank to which a draft had been delivered for collection liable to the owner for the pro- ceeds of the draft as a trust fund, where such bank, be- fore insolvency, had converted the draft by sending it to another bank to be applied on the former's over- drafts, though the latter bank had security for the over- drafts, since the proceeds of the draft never came into> the possession of the receiver.^^'^ § 154. Proceeds collected by assignee or receiver. The proceeds of a collection paid to the receiver of the collecting bank after its insolvency are held by him as a special trust fund, which may be recovered in full.^^* 115 State V. Southern Bank, 33 La. Ann. 957. See, also, Wil- liams V. Cox, 97 Tenn. 555. 116 In re Seven Corners Bank, 58 Minn. 5, 59 N. W. 633; West- fall V. Mullen, Id. Contra, see Kansas State Bank v. First State Bank of Marion (Kan.* Sup.) 64 Pac. 634, where the use of the paper and proceeds in making daily clearance is held to augment the assets. iiT Thuemmler v. Barth, 89 Wis. 381, 62 N. W. 94, and cases cited. See, also. In re Hallett [1894] 2 Q. B. Div. 237; Ex parte Blane, Id. 118 Henderson v. O'Conor, 106 Cal. 385, 39 Pac. 786; Jockusch V. Towsey, 51 Tex. 129; Guignon v. First Nat. Bank of' Helena, (241) § 154 BANK COLLECTIONS. [Ch. 7 It is readily seen that, in sucli case, the proceeds form a distinct part of the assets of the bank. The rule is es- pecially pertinent if the paper was originally sent to the bank "for collection," and ^vas credited "subject to pay- ment." ^^^ The rule has been applied where the col- lecting bank took the check of the debtor for the amount of paper left for collection, but the check was not paid until after the collecting bank had suspended ;^2o j^^^j where the bank accepted a check in payment, and, in- stead of demanding j^ayment, took a certification of the check, and suspended before it was paid, payment hav- ing been made ultimately to the receiver ;^^^ and where the bank failed before checks deposited for collection were collected, but the proceeds came into the hands of the receiver, and there had been no agreement that the checks should be treated as cash, or could be drawn against.^^^ The proceeds of commercial paper fraudulently re- ceived by a bank for collection when it was insolvent, Avithin tlie knowledge of its ofticers, are sufficiently 22 Mont. 140, 55 Pac. 1051, 1097. See, also, cases cited in notes 119-124, infra. Checlts deposited in a bank for collection at a time when its condition was such as to charge its officers with knowledge of Its hopeless insolvency, and remaining uncollected when the hank suspended, may be reclaimed by the owner from the receiver of the bank. Richardson v. Denegre, 93 Fed.- 572. 110 First Nat. Bank of Wellston v. Armstrong, 42 Fed. 193. 120 German-American Bank v. Third Nat. Bank, Fed. Cas. No. 5,359, 18 Alb. Law J. 252. 121 Levi V. National Bank of Missouri, 5 Dill. 104, Fed. Cas. No. 8,289. 122 Beal V. City of Somerville, 50 Fed. 647, 1 C. C. A. 598, 5 XJ. S. App. 14. (242) Ch. 7] RIGHTS AND LIABILITIES. 8 155 traced to establish a preference where it is shown that they are included in a fund paid over to the receiver by a correspondent as the proceeds of credits made after failure of the bank, but bef6re notice thereof to the cor- respondent.^-^ Where the initial bank fails after notice of a complet- ed collection by its correspondent in another state, and after crediting the amount without authority from the owner, and its receiver receives the proceeds, he holds them in trust for the owner.^^* S 155. Bank as owner of paper and proceeds. Consistent with the rules heretofore considered as to the circumstances under Avhich title passes to the bank is the doctrine that no preference is allowable where the paper was indorsed in blank and deposited for credit, and the depositor allowed to draw out part of the fund;^-^ and that no right to a preference for the proceeds of a check exists Avhere it was deposited and treated as cash, and charged as such to a correspondent bank to which it was sent, and the initial bank gave to the depositor, for part of the amount, cash and a cer- tificate of deposit, and absolute credit for the balance, prior to insolvency.^^'^ So, also, where a running account is kept, and an ab- solute debit and credit given, between the two banks, and 123 Bruner v. First Nat. Bank of Johnson City, 97 Tenn. 540, 37 S. W. 286, and cases cited. 124 Henderson v. O'Conor, 106 Cal. 385, 39 Pac. 786. 125 Williams v. Cox, 9? Tenn. 555; State v. Southern Bank, 33 La. Ann. 957. i26Friberg v. Cox, 97 Tenn. 550, 37 S. W. 283. (243) § 155 BANK COLLECTIONS. [Ch. 7 a balance is struck at regular periods, and remittances immediately made accordingly, the proceeds of the col- lections having been mingled with other funds of the collecting bank, the creditor bank has no lien on any specific funds, and is not entitled to a preference in case of the insolvency of the collecting bank.^^'^ In such case, the relation is merely that of debtor and creditor, and "each sum collected, as it came in, became the prop- erty of the collecting bank, who simply became liable to account for it to the other on the next settling day."^^* Nor can a claim of preference be predicated of the pro- ceeds of a collection sent with directions to "forward draft to me for balance," less the bank's charges, since, in such case, title to the proceeds, when realized, is in the bank.129 Where it was the intention of both parties that the owner of a note in the hands of a bank for collection should receive credit for the proceeds when collected, and that the bank could treat the funds as it did funds of other depositors, the bank had a right to mingle the funds with the other funds, so that, on its subsequent insolvency, the owner was simply an ordinary creditor, and was not entitled to a preference, and could not fol- low the proceeds as a trust fund.^^° But where the col- lecting bank had not been in the habit of crediting the proceeds of collections as a deposit for a particular cus- tomer, but had always remitted the proceeds promptly, 12T People V. City Bank of Rochester, 93 N. Y. 582. 128 People V. City Bank of Rochester, 93 N. Y. 582. i29Sayles v. Cox, 95 Tenn. 579, 32 S. W. 626. 130 Union Nat. Bank v. Citizens' Bank ot Union City, 153 Ind. 44, 54 N. B. 97. (244) Ch. 7] RIGHTS AND LIABILITIES. § 157 the customer, on its failure after collecting paper for him, may receive in full from the receiver.^^i § 156. Preference limited to assets realized at time of failure of bank. Where the bank fails after collecting, but before re- mitting, and its assets, at the time of the failure, are less in amount than the proceeds of the collection, the trust nature and lien following the proceeds is limited to the cash on hand at the time of the failure, the presumption being that such cash is the residuum of the trust money, and does not extend to the fund subsequently realized by the receiver out of other assets.^ ^^ § 157. Waiver of preference or trust. The right to follow the proceeds of a collection as a preferential trust fund is not lost or waived by merely filing a claim as a general creditor ;^^^ nor by accepting a dividend from an insolvent collecting bank, as a gen- eral creditor, in ignorance of the fact that the bank, when it received the paper for collection., was hopelessly insolvent, within the knowledge of its officers, and had 131 Hunt V. Townsend (Tex. Civ. App.) 26 S. W. 310, citing Con- tinental Nat. Bank of New York v. Weems, 69 Tex. 489, 6 S. W. 802, 5 Am. St. Rep. 85. 132 Boone County Nat. Bank v. Latimer, 67 Fed. 27. That the trust for the amount of the proceeds is impressed on all the assets, see Continental Nat. Bank of New York v. Weems, 69 Tex. 689, 6 S. W. 802, 5 Am. St. Rep. 85, and cases cited in notes 95, 96 and 100 supra. Presumption that payments made from fund with which proceeds were mingled were made from the portion belonging to the bank and not from the trust money, see supra, note 100. 133 Nurse v. Satterlee, 81 Iowa, 491, 46 N. W. 1102. (245) § 157 BANK COLLECTIONS. [Ch. 7 thus committed a gross fraud on the depositors, where a second dividend was refused, and the first refunded, af- ter knowledge of the facts.^^* But the right to prefer- ence is lost by proving up the claim as an unpreferred claim, and obtaining an adjudication thereon as a gen- eral claim, and accepting dividends on it as such>^^ 13* Importers' & Traders' Nat. Bank v. Peters, 123 N. Y. 272, 25 N. E. 319, affirming 51 Hun, 640, 4 N. Y. Supp. 599. See, also, Allerton v. AUerton, 50 N. Y. 670. 135 Anheuser-Busch Brewing Ass'n v. Morris, 36 Neb. 31, 53 N. W. 1037. (246) Ch. 8] FORGED OR ALTERED PAPER. CHAPTER VIII. COLLECTION OP FORGED' OR ALTERED PAPER. § 158. What law governs liability of collecting bank. 159. Name of maker or drawer forged. 160. Estoppel of bank by acts of cashier. 161. Drawee bank not charged with knowledge of alterations. 162. Indorsement of payee forged. 163. Diligence in notifying parties to paper. 164. Liability of collecting bank on its indorsement of forged paper. 165. Charging back amount of forged or altered paper. 166. Recovery back of payments made on forged or altered paper. 167. Bank's agency undisclosed. 168. Effect of certiilcation of paper by drawee bank. 169. Ratification and waiver. The laws of the place where the immediate acts constituting the mistaken or wrongful payment of forged paper are per- formed govern the liability of the collecting bank to the owner. The general rule that the drawee is charged with knowledge of the signature of the drawer renders the drawee bank liable to a bona fide holder of paper paid by it, on which the signature of the drawer was forged. The rule does not apply in favor of a payee who indorsed the forged paper to the bank. The drawee bank is not, however, charged with knowledge of the genuineness of the body of the instrument as between itself and others having equal means of ascertaining the ex- istence of an alteration. A collecting bank is liable to the true owner if it pays the paper on a forged indorsement of the name of the payee; but (247) 8 158 BANK COLLECTIONS. [Ch. 8 an indorsement of the payee's name is not forged if made by the person intended as payee, though the paper was procured by his fraud and falge representations as to his identity. The bank must use reasonable diligence in notifying the parties of the forgery or alteration. In some jurisdictions, the collecting bank, on indorsing forged paper without restriction or qualification, is liable as a general indorser, though the paper had been previously in- dorsed to it restrictively for collection. The rule is different in the federal courts. If the collecting bank itself indorses the paper for collection, it is not liable as general indorser. The right to recover back payments made on forged or altered paper is governed, for the most part, by the rules governing the recovery of payments made by mistake. If the collect- ing bank, before notice of the forgery or alteration, paid the amount over to the sending bank, it is not liable; but a mere credit is not a payment within this rule. Successive indorsers who have in turn paid money on the paper by mistake, the name of the first indorser having been forged, may recover, each from his immediate indorser. The bank is accountable for money received on forged paper if it did not disclose its so-called agency for collection. The acts of the bank may be waived or ratified, as where a settlement is made with the wrongdoer, with full knowledge of all the facts. § 158. What law governs liability of collecting bank. Reasoninji' by analogy from the rules detennining what law governs the relation between the depositor and the collecting bank,^ we may state that the laws of the place of the performance of the immediate acts con- stituting the mistaken or wrongful payment of forged paper by a collecting bank govern its liability therefor 1 See ante, § 6. (248) Ch. 8] FORGED OR ALTERED PAPER. g 158 to the true owner. No American case directly in point has been fonncL, but a very instructive Englisli case is available. In deciding what law governed the liability of a Lon- don bank, with a branch in Paris, to the owner of a cheque crossed generally, and drawn on the London bank, which had been presented to the Paris branch for collection, and paid by it on a forged indorsement of the name of the last indorsee, the laws of France ex- onerating the collecting bank in such a case, and the laws of England rendering it liable for conversion, the court of queen's bench recently (189.6) said: "Collec- tion had to be obtained by acts done partly in Paris and partly in England, and as soon as the person carrying -out these acts — if I may assume that they were all car- ried out by one person for the collecting bank — reached England, he came under English law, and anything done by him subsequently, if it amounted to a wrong, must be justified, if at all, by English law. But that is not ■conclusive of 'the matter. It is necessary to consider whether any acts were done in England for the purpose of carrying out what was legitimate by French law, but which, constituting a legal wrong in England, are un- protected by English law. Upon behalf of the plaintiffs it was contended that the case ought to be dealt with as if the post office did not exist, and the bank in Paris con- sisted of one individual, who personally carried out the complicated transaction which was in fact effected through the medium of the post, and the cross entries made in the books of the bank. Under such circum- stances, it would be necessary for the individual to carry the cheque to England, and proceed to London for the (249) § 159 BANK COL.LEK3TIONS. " [Ch. 8 purpose of cashing it for a person who was not the true owner. If the individual presented it for payment in England, and received payment there, he would by both those acts have committed what amounts to conversion in English law. Upon analysis it will be seen that those acts were done by the French bank, — it is immaterial whether by traveling to England or by means of third persons, — and the question is whether, according to En- glish law, the transaction amounts to a conversion." ^ § 159. Name of maker or drawer forged. As a general ru,le, the drawee of a check or draft is charged with knowledge of the handwriting of its cus- tomer or correspondent, the drawer, and, if the draA\ee pays the paper, it must stand the loss if the paper was a forgery, and has passed into' the hands of a bona fide- purchaser.^ The leading case on this question states that it was 2 La Cave & Co. v. Credit Lyonnais, 66 Law J., Q. B. 226. See, also, Kleinwort v. Le Comptoir Natlonale d'Escompte de Paris, 63 Law J., Q. B. 674, [1894] 2 Q. B. Div. 157. 3 Northwestern Nat. Bank of Chicago v. Bank of Commerce of Kansas City, 107 Mo. 402, 410, 17 S. W. 982, 15 L. R. A. 102; Stout V. Benoist, 39 Mo. 277, and cases cited; United States IVTat, Bank v. National Park Bank, 59 Hun, 495, 13 N. Y. Supp. 411, afflrmed (on opinion of court below) in 129 N. Y. 647, 29 N. B. 1028; Craw- ford V. West Side Bank, 100 N. Y. 54, 2 N. E. 881; Oppenheim v. West Side Bank, 22 Misc. Rep. 722, 50 N. Y. Supp. 148; First Nat. Bank of Carthage v. Yost, 58 Hun, 606, 11 N. Y. Supp. 862; 3 Ata. & Eng. Enc. Law, 222; Price v. Neal, 3 Burrows, 1354. The fact that the signature of the drawer had been, touched up somewhat with a brush or quill, a "t" crossed, an "i" dotted,, and a period added, does not render it a forgery. United States Nat. Bank v. National Park Bank, supra, which see for sufficiency of evidence as to forgery of the drawer's signature. (250) Ch. 8] FORGED OR ALTERED PAPER. ^159 incumbent on the drawee to satisfy himself "that the bill drawn upon him 'was the drawer's hand' before he ac- cepted or paid it ;" and that, having paid it to a bona fide indorser for value, he cannot recover back the money from him, though the signature of the drawer was forg- ed.* In a Massachusetts case, decided in January, 1901, Holmes, C. J., in holding that the drawee bank cannot recover back money paid through the clearing house to a collecting bank, on a forged check payable to cash and unindorsed, on the ground that it was charged with knowledge of the signature of the dra\\'er, and that, un- der the evidence, it could not have been misled by the lack of indorsement, said: "The plaintiff's argument is directed to proving that we should not adopt the rule laid down in Price v. Neal, 3 Burrows, 1354, according to which a drawee paying a forged draft or check to a bona fide purchaser cannot recover back the money paid. We are aware that this rule has been questioned by some text writers ; but it is of such universal, or nearly univer- sal, acceptance, that we shall go into no extended dis- cussion. * * * Probably the rule was adopted from an impression of convenience, rather than for any more academic reason ; or perhaps Lord Mansfield took - the case out of the doctrine as to payments under a mistake of fact, by the assumption that a holder who simply pre- sents negotiable paper for payment makes no represen- tation as to the signature, and that the drawee pays at his peril." ^ 4 Price V. Neal, 3 Burrows, 1355. To same effect is Smith v. Mercer, 6 Taunt. 76. B Dedham Nat. Bank v. Everett Nat. Bank (Mass.) 59 N. E. 62. See, also, cases and authorities cited in above case. (251) § 159 BANK COLLECTIONS. |"0h. 8 The doctrine that the drawee, who has paid a forged checlv or draft, is charged with knowledge of the draw- er's signature, is not available to the payee, who took the check from a stranger Avithout inquiry, though in good faith, and himself indorsed it, and thereby gave it currency and credit ; since the indorsement by the payee gives the paper the appearance of genuineness, and tends to divert the drawee from scrutiny and inquiry.^ This modification of the general rule is of general ap- plication; and will relieve the drawee from liability to any party to the paper who has in any way contributed to the success of the fraud, or to the mistake of fact un- der which the payment was made.'' A peculiar case decided by the supreme court of Louisi- ana is governed by this modification of the general rule. The holding in that case is that, where a steamboat agent, after being informed by letter that a draft drawn on the captain of the boat had been deposited in a cer- tain bank for collection, went to the bank on the day it was due, described and called for the draft, and volun- tarily paid it without further inquiry, the bank, which received no compensation for the transaction, and made no entries of it on the books, is not liable to him for the amount thereof, both the letter and the draft having been forged, where it appeared that the draft was de- s National Bank of North America v. Bangs, 106 Mass. 441 ; El- lis V. Ohio Life Insurance & Trust Co., 4 Ohio St. 628; Birmingham Nat. Bank v. Bradley, 103 Ala. 109, 15 So. 440, and cases cited. See, also, Green v. Purcell Nat. Bank, 1 Ind. Ter. 270, 37 S. W. 50. 7 Gloucester Bank v. Salem Bank, 17 Mass. 33, 42; Ellis v. Ohio Life Insurance & Trust Co., 4 Ohio St. 628; National Bank of North America v. Bangs, 106 Mass. 441. Ch. 8] FORGED OR ALTERED PAPER. § K.o posited by a stranger with instructions that, if no one called to pay it before three o'clock, it was to be given to a notary for protest, and plaintiff called and paid it a few minutes later, and the amount was turned over to the depositor on the same day.* § 160. Estoppel of bank by acts of cashier. While it is true that the cashier is the general execu- tive officer of the bank for whose acts it must stand as sponsor, yet, to create an estoppel against the bank by reason of his acts and representations as to forged paper, his connection with the transaction must be definitely shown. The force of this rule is well shown in a case where a forged certificate of deposit was sent by plaintiff to defendant for collection, and by the latter sent to the bank purporting to have issued it. The cashier of the last-named bank passed it to the bookkeeper with other paper received from defendant, and a checlt was sent cov- ering the aggregate amount of all the paper so received. The forgery was not discovered until after business hours of that day, when the bank immediately notified plaintiff and its principal of the forgery. On the next day it returned the certificate to defendant, who re- credited such bank with the amount thereof under a gen- eral agreement to that effect respecting commercial pa- per found not good. It was held that defendant was justified in refunding the money to such bank as money paid by mistake, and that the passing of the forged cer- tificate over to the bookkeeper did not amount to such a recognition of the genuineness of the certificate as would 8 Stephenson v. Mountj 19 La. Ann. 295. (253) § 162 BANK COLLECTIONS. [Ch. 8 preclude the bank from setting up the subsequently dis- coyered forgery, in the absence of a showing that the. cashier actually passed on the genuineness of the certifi- cate, or that it was his duty to do so, or that his acts were communicated to plaintiff or to defendant.® S 161. Drawee bank not charged with knowledge of altera- tions. The rule considered in the preceding section, that the drawee is charged with knowledge of the signature of the drawer, does not charge the drawee with knowledge of anything but the signature of the drawer. It does not charge him with knowledge of the genuineness of the body of the instrument, as between himself and other parties haring equal means of determining the existence of an alteration.^" § 162. Indorsement of payee forged. A bank which collects and pays to the depositors there- of checks, payable to order, on which the indorsement Allen V. Fourth Nat. Bank of New York, 59 N. Y. 12, affirming 5 Jones & S. 137, distinguishing Price v. Neal, 3 Burrows, 1354, and citing Goddard v. Merchants' Bank, 4 Comst. (N. Y.) 149, and National Bank of Commerce v. National Mechanics' Banking Ass'n, 55 N. Y. 21l/note. 10 Crawford v. West Side Bank, 100 N. Y. 54, 2 N. B. 881; United ■States Nat. Bank v. National Park Bank, 59 Hun, 495, 13 N. Y. Supp. 411, affirmed (on opinion of court below) in 129 N. Y. 647, 29 N. B. 1028; National Bank of Commerce v. National Mechanics' Banking Ass'n, 55 N. Y. 211; White v. Continental Nat. Bank, 64 N. Y. 316; Oppenheim v. West Side Bank, 22 Misc. Rep. 722, 50 N. Y. Supp. 148; Metropolitan Nat. Bank v. Merchants' Nat. Bank, 182 111. 367, 55 N, B. 360, affirming 77 111. App. 316; First Nat. Bank of Chicago v. Northwestern Nat. Bank, 152 111. 296, 38 N. E. 739. (254) Ch. 8] FORGKD OR ALTERED PAPER. § 162 of the payee had been forged before deposit in the bank, is liable to the payee for conversion of the checks, though it Avas ignorant of the forgery, and acted in good faith.^^ Where a bank has collected the amount of a check re- ceived on a forged indorsement of the name of the payee, to whom the instrument had never been delivered, such X^ayee, by a subsequent demand on the bank for the pro- ceeds, ratifies the indorsement, and makes the check his property to such an extent as to sustain an action by him for the proceeds.'- ' The supi'euie court of Tennessee says further us to the objection of want of privity: "The action against the wrongdoer does uot rest upon privity, but upon the fact that he has intermeddled with property not his own, and, asserting a hostile claim, he lias interfered with the lawful use and dominion of the owner of the property."'^ But an indorsement of the payee's name is not forged when made by the person named and intended to be named as payee, who received 11 Farmer v. People's Bank, 100 Tenn. 187, 47 S. W. 234; Pickle V. Muse, 88 Tenn. 381, 12 S. W. 919; Chism v. First Nat. Bank of New York, 96 Tenn. 641, 36 S. W. 387; Talbot v. Bank of Rochester, 1 Hill (N. Y.) 295; Buckley v. Second Nat. Bank of Jersey City, 35 N. J. Law, 400; Shaffer v. McKee, 19 Ohio St. 526; Salomon v. State Bank, 28 Misc. Rep. 324, 59 N. Y. Supp. 407. One whose property has been wrongfully converted is not bound to take it back, but may abandon it from the moment of its con- version, and sue for its value. Id.; People v. Bank of North Amer- ica, 75 N. Y. 564. Liability of bank on its indorsement of the paper, see post, § 164. 12 Farmer v. People's Bank, 100 Tenn. 187, 47 S. W. 234; Pickle V. Muse, 88 Tenn. 381, 12 S. W. 919; Talbot v. Bank of Rochester, ] Hill (N. Y.) 295; Buckley v. Second Nat. Bank of Jersey City, 35 N. J. Law, 400. 13 Farmer v. People's Bank, 100 Tenn. 187, 47 S. W. 234. (255) §162 BANK COLLECTIONS. [Ch.S the paper from the drawer, and was the actual person with whom the whole transaction was made, though he had fraudulently procured the draft by using as security a worthless note and mortgage purporting to have been, but not having been, executed by a man and wife having the same surname as such payee." The same rule holds where the payee had fraudulently represented himself to be the owner of land, and had obtained the paper by impersonating the real owner, but was, nevertheless, the person dealt with and intended as the payee of the pa- per.i^ In England, the liability of the bank is now governed by statute. The English Bills of Exchange Act 1882, § 82, providing that, "where a banker in good faith and without negligence receives payment for a customer of a cheque crossed generally or specially to himself, and the customer has no title or a defective title thereto, the banker shall not incur any liability to the true owner of the cheque by reason only of having received such pay- ment," protects a bank collecting for a customer the amount of a crossed cheque, on a forged indorsement of the payee's name, though at the time of receiving pay- ment, and crediting it to the customer, his account was overdrawn and a part of the credit canceled the over- draft.18 1* First Nat. Bank of Ft. Worth, v. American Exchange Nat. Bank, 49 App. Div. 349, 63 N. Y. Supp. 58. 15 Emporia Nat. Bank v. Shotwell, 35 Kan. 360, 369; Crippen v. Arneriean Nat. Bank of Kansas City, 51 Mo. App. 509, and cases cited; Land Title & Trust Co. v. Northwestern Nat. Bank, 196 Pa. St. 230, 50 L. R. A. 75, and note collecting cases. 16 Clarke v. London & County Banking Co., 66 Law J., Q. B. 354. (256) (:;h. 8J FORGED OR ALTERED PAPER. § 162 This section of tlie act is applicable, however, only in case the bank is dealing with a "customer ;" and a stran- ger to the bank, whose only transaction with tlie bank is the passage on it of the forged instrument, is not a "cus- tomer," within the meaning of the act, and, in such case, the collecting bank, if it pays the amount of the paper to such stranger, is liable to the true owner for f( inver- sion of the funds.^'^ The rule applied above, as to the effect of the indorse- ment to the collecting bank of paper on which the name of the draAver had been forged, applies also where the bank receives the paper from one who had indorsed it fol lowing a forged indorsement of the payee's name. Thus, where plaintiff in good faith took a check on a forged indorsement of the payee, ahd indorsed it in blank and delivered it to defendant bank for collection, and receiv- ed the proceeds from the bank, the latter, on discover- ing the forgery and refunding the money to the drawee bank, may reimburse itself out of the first moneys of the plaintiff that come into its possession, though it had not notified plaintiff of the forgery ; since plaintiff guar- antied the genuineness of the payee's indorsement, and having received the proceeds, was chargeable with no- tice of the forgery.^* The payee of a check, by suing the bank which collect- 17 La Cave & Co. v. Credit Lyonnais, 66 Law J., Q. B. 226; Mat- thews 'v. Brown & Co., 10 Times Law R. 386, [1894] 63 L. J. Q. B. 494; Kleinwort v. Le Comptoir Nationale d'Bscompte de Paris, 63 Law J., Q. B. 674, [1894] 2 Q. B. Div. 197; Arnold v. Cheque Bank, 45 Law J., C. P. 562, 1 C. P. Div. 578. 18 Green v. Purcell Nat. Bank, 1 Ind. Ter. 270, 37 S. W. 50. See, also, Mayer v. City of New York, 63 N. Y. 455, 457; Indig v. Na- tional City Bank, 80 N. Y. 100, 105. (25Y) § 163 BANK COLLECTIONS. [Ch. 8 ed and paid over the amount thereof on a forged indorse- ment of his name for conversion of the check, afllrms and ratifies the payment of the check by the maker.^^ § 163. Diligence in notifying parties to paper. The collecting bank must exercise reasonable diligence in notifying the holder or party from whom it received the paper of the forgery or alteration.^" But the bank is under no ol)ligation to give notice of the forgery of an indorsement of the payee's name to one who had in- dorsed the forged paper in blank to the bank for collec- tion, and had received the proceeds.^^ We shall also see later that a collecting bank may be required to repay, though it had paid the money over to its principal be- fore notice of the forgery, Avliere it had not disclosed its agency for collection when it received payment.^^ In case of an alteration, the bank exercises due dili- gence if it notifies the holder personally, on the day it is itself notified of the fraud, and also informs him of the same fact by letter three days later.^^ The English rule is that "the holder of a bill is entitled to know, on the day when it becomes due, whether it i5> Salomon v. State Bank, 28 Misc. Rep. 324, 59 N. Y. Supp. 407; White V. Sweeny, 4 Daly (N. Y.) 223. 20 Bank of Commerce v. Union Bank, 3 N. Y. 230 ; Oppenheim v. West Side Bank, 22 Misc. Rep. 722, 50 N. Y. Supp. 148. 21 Green v. Purcell Nat. Bank, 1 Ind. Ter. 270, 37 S. W. 50, and cases cited; Birmingham Nat. Bank v. Bradley, 103 Ala. 109, 15 So. 440, and cases cited. See, also, National Bank of North Amer- ica V. Bangs, 106 Mass. 441. 22 See post, § 167. 23 Oppenheim v. West Side Bank, 22 Misc. Rep. 722, 50 N. Y. Supp. 148. (2.58) Ch. 8] FORGED OR ALTERED PAPER. § 163 is an honored or dishonored bill," and hence, where a forged acceptance is delivered to the acceptor's bank- ers on the daj' it is due, and they pay it on that day, but discover, on the following day, that it is a forgery, and give notice on that day to the holder, it cannot recover back the money paid ;^* aliter if notice was given on the day when payment was made.^^ On the question of the difference between negligence in discovering a forgery or alteration and negligence in failing to give notice after the discovery, the supreme court of Xew York, in a well-considered case, says : "A failure to discover, though resulting in a loss to another who miglit, if sooner apprised, have apprehended the forger, and recovered the money, gives no right of ac- tion, and for obvious reasons, one of which alone need be mentioned. There is no duty imposed on one who re- ceives a forged check from another to unearth the crime. He receives it presuming, as he has a right to do, that all the signatures and indorsements are genuine, which is impliedly warranted by the person from whom it is re- ceived. This presumption, and the right to rely on this implied warranty, fire only destroyed when, by inspec- tion, the forgery could be detected because apparent on the face of the check or bill, or where, from the sur- rounding circumstances, the suspicions of the persons receiving the note, check, or bill should be aroused, and his scrutiny challenged. Not so after discovery, for then the duty is incumbent on the one detecting the imperfection to act promptly in giving notice, and, if 24 Cocks V. Masterman, 9 Barn. & C. 902. ■25 Wilkinson v. .Jolmson, 3 Barn. & C. 428. (259) § 164 BANK COLLECTIONS. [Ch. 8 he fails therein to the injury and damage of the one en- titled to notice, he will be prevented from recovering the damage or injury shown to have been actually in- curred." ^^ § 164. Liability of collecting bank on its indorsement of forged paper. We have already considered the liability of a collect- ing bank on its indorsement of genuine paper.^^ If it indorses, without qualification or restriction, paper to which the signature of the maker or drawer was forged, it is liable to a. bona fide holder on its implied warranty of the genuineness of the instrument,^* and the genuine- ness of the signature of the maker or drawer.^® Under the negotiable instruments laws, this is true, though the paper had been previously indorsed to the bank re- strictively for collection.^" The federal courts, however, hold that the general indorsement of a collecting bank does not imply a war- ranty that a prior indorsement is genuine. The case resulting in this decision arose over a pension draft, to which the name of the payee had been forged after her death. The draft was indorsed "for collection" to defendant bank by the initial bank, and, after having been indorsed generally by defendant, was paid to it 26 Third Nat. Bank of New York City v. Merchants' Nat. Bank, 76 Hun, 475, 27 N. Y. Supp. 1070. 27 See ante, § 53. 28 Crosby v. W^rlght, 70 Minn. 251. 29 Brown v. Ames, 59 Minn. 476; Condon v. Pearce, 43 Md. 83; First Nat. Bank of Chicago v. Northwestern Nat. Bank, 40 111. App. 640; Turnbull v. Bowyer, 40 N. Y. 456. 30 See ante, § 53. (260) Ch. 8] FORGED OR ALTERED PAPER. § 164 by the United States, and the money remitted to the initial bank. It was held that defendant bank was not liable to the United States for the amount of the draft ; the court stating that, "in such cases, the indorsement by the collecting agent, who has no proprietary inter- est, does not import any guaranty of the genuineness of all prior indorsements, but only of the agent's rela- tion to the principal, as stated upon the face of the draft; and as this relation is evident upon the draft itself, the payor cannot claim to have been misled by the indorsement of the agent, or any right to rely on that indorsement as a guaranty of the genuineness of the payee's indorsement."*^ As to the effect of a collecting bank's restrictive in- dorsement "for collection," placed on paper to which the signature of- the maker or drawer was forged, the supreme court of Missouri has rendered an instructive decision. Defendant bank cashed and paid full value for a forged draft presented to it by the payee, and indorsed by him. The payee had been introduced to the defendant by a letter from the cashier of another bank, showing the payee's genuine signature. When the letter was presented, the payee of the draft had also deposited in defendant bank a genuine certificate of de- posit, issued by the bank that gave the letter, and later drew out only a small portion of his deposit. He was dressed neatly, and did nothing to cause suspicion. The forgery was so well done that the drawer bank at first thought the draft to be genuine. It was held that 31 Ifnited States v. American Exchange Nat. Bank, 70 Fed. 232, distinguishing Onondaga County Sav. Bank v. United States, 12 C. C. A. 407, 64 Fed. 703. (261) § 165 BANK COLLECTIONS. [Oh. 8 defendant M^as a iona fide purchaser, and, having in- dorsed the draft merely "for collection," was not ac- countable to the drawee bank which paid it.*^ The indorsement of the collecting bank on a forged check payable to cash, and not otherwise indorsed, and the presentment thereof to the drawee through the clearing house, is not equivalent to an indorsement by the payee, since not made for the purpose of transfer; but is merely equivalent to a presentment by the bank in person.^* § 165. Charging back amount of forged or altered paper. A collecting bank which has credited the amount of a check, but has remitted no money on account thereof, may charge back the amount thereof on discovering that it had been raised before it was delivered to the bank.^* This rule is in harmony with the general rules previ- ously considered, as to the right to charge back a credit given for worthless paper.^^ Where the bank has not been guilty of negligence with respect to altered paper, and the holder had no- tice of facts putting him on inquiry, the bank will be protected. A case in point arose where plaintiff, a merchant in Philadelphia, received from a total stran- ger, in payment of a bill of goods, a certified check on a New York bank, payable to his order for a sum largely in excess of the price of the goods bought. Plaintiff, 32 Northwestern Nat. Bank of Chicago v. Bank of Commerce of Kansas City, 107 Mo. 402, 412, 17 S. W. 982, 15 L. R. A. 102. ssDedham Nat. Bank v. Everett Nat. Bank (Mass.) 59 N. B. 62. 34 Birmingham Nat. Bank v. Bradley, 103 Ala. 109, 15 So. 440. 35 See ante, § 15. (262) Ch. 8] FORGED OR ALTERED PAPER. § 165 before accepting the check or paying the dil¥erence to the purchaser, took the check to the defendant bank, where he had an account, and asked tlie advice of the cashier, who advised him, solely because of the suspi- cious nature of the transaction, to have nothing to do with the checli, though it was apparently good and regular. The cashier told plaintilf, however, that he could deposit it with the bank for collection in the due course of business, and that the bank would for- ward it for that purpose, which was done, and credit given accordingly. The check was paid by the drawee bank, but had been altered, before certification, as to the date and the name of the payee, and had been raised from $7.75 to |900.00, but the alterations were so skillfully made that they could not be detected by ex- amination, and were discovered only when the drawer's account was balanced at the end of the month. It was held that defendant bank was not guilty of negligence, and that, on the discovery of the alterations, it was jus- tified in refunding to the drawee bank, and charging back the amount against the account of the plaintiff.^'^ While it may be true that a bank would be estopped to claim a right to charge back the amount of raised paper, if its cashier had represented to the holder that it was good, and the holder had acted on this repre- sentation to his injury, the fact that the discount and collection teller of the collecting bank stated to the holder, after inquiry by him, that the check was "all right," at a time when neither party knew of any altera- tion, or had any suspicion that the check was raised, 3« Rapp V. National Security Banlt, 136 Pa. St, 426, 20 Atl. 508. (263) § 166 BANK COLLECTIONS. [Ch. 8 and that the holder, in reliance on the statement, paid over money to the one from whom he received the check, does not estop the bank, which subsequently discovered the alteration, from claiming a right to charge back the amount it had credited to the holder in excess of the amount of the check before alteration, as the duties of such teller relate only to the discount and collection of commercial paper, and his statement must conse- quently be limited to the fact of its payment by the drawee, and cannot be extended to the genuineness of the body of the check.^^ § 166. Recovery back of payments made on forged or altered paper. The general rule is that money paid upon a raised check may be recovered back, providing the one seeking to recover has not, by his careless or negligent act, in- jured or prejudiced the rights of the person from whom recovery is sought.^* But since a collecting bank, to which the payee of a forged or raised check indorsed the same, and from which he received full face value there- 3T Oppenheim v. West Side Bank, 22 Misc. Rep. 722, 50 N. Y. Supp. 148. See, also, Espy v. Bank o( Cincinnati, 18 Wall. (U. S.) 604; Marine Nat. Bank v'. National City Bank, 59 N. Y. 67; Se- curity Bank of New York v. National Bank of Republic, 67 N. Y. 458. •18 National Bank of Commerce v. National Mechanics' Banking Ass'n, 55 N. Y. 211; Marine Nat. Bank v. National City Bank, 59 N. Y. 67, 77; Clews v. Bank of New York National Banking Ass'n, 89 N. Y. 419; National Park Bank of New York v. Eldred Bank, 90 Hun, 285, 35 N. Y. Supp. 752; Oppenheim v. West Side Bank, 22 Misc. Rep. 722, 50 N. Y. Supp. 148. (264) €h. 8] FORGED OR ALTERED PAPER. § 166 for, is under no obligation to such payee to discover the fraud,^® it may recover back the money so paid.*" Where the collecting bank has received money by mistake, as under forged or raised paper, and has paid it over to its principal before receiving notice of the forgery, or other fraud inducing the payment, it can- not be comi)elled to repay.*^ The rule is different, how- ever, if the bank, as last indorsee of paper on which the indorsement of the payee had been forged, received payment from the drawee without disclosing its so- called agency for collection.''^ If the collecting bank has not paid over any money or made an actual remit- tance to its principal, but has merely credited to it the 39 See ante, § 163. io Birmingham Nat. Bank v. Bradley, 103 Ala. 109, 15 So. 440; Green v. Purcell Nat. Bank, 1 Ind. Ter. 270, 37 S. W. 50. See, also, ■Carpenter v. Northborough Nat. Bank, 123 Mass. 66; WMte v. Con- tinental Nat. Bank, 64 N. Y. 316; Susquehanna Valley Bank v. Loomis, 85 N. Y. 207; National Park Bank v. Seaboard Bank, 114 N. Y. 28, 20 N. E. 632. *i National Park Bank v. Seaboard Bank, 114 N. Y. 28, 20 N. E. 632, 11 Am. St. Rep. 612, distinguishing Metropolitan Nat. Bank v. Loyd, 90 N. Y. 530; La Farge v. Kneeland, 7 Cow. (N. Y.) 460; Mowatt V. McLelan, 1 Wend. (N. Y.) 173; Herrlck v. Gallagher, •60 Barb. (N. Y.) 566; Story, Agency, § 300. In the case first cited in this note, there was evidence that the proceeds of the draft involved in suit, and also the entire amount that the principal bank had to its credit with the collecting bank at the time the proceeds of the draft were turned over to the principal, had been drawn out at least two weeks before the alteration of the draft was discovered, and the court applied the familiar rule as to ap- plication of payments, — that where there is no specific direction, the payment will be applied to the oldest items (page 35); citing Sheppard v. Steele, 43 N. Y. 52; Allen v. Culver, 3 Denio (N. Y.) :284; Webb v. Dickenson, 11 Wend. (N. Y.) 63. *^ See post, § 167. (265) § 166 BANK COLLECTIONS. [Q]^ g: amount of the paper, whicli credit has never been drawn against, the collecting bank is liable as for money paid to it under mistake.^^ Bach of several successive indorsers of a bill, who have successively paid money thereon by mistake, the name of the first indorser having been forged, may re- cover from his immediate indorser.** An interesting case on the question of the right of the drawee bank to recover back money paid to a col- lecting bank on forged paper was recently decided by the New York court of appeals. The forger first cashed a check for |2,400 at the defendant bank by forging the name of one of its depositors. He thereafter de- posited in plaintiff bank a forged draft on a third bank for |6,000, which plaintiff collected, but afterwards re- paid to the drawee bank on discovery of the forgery. Prior to the discovery of this second forgery, and while the |6,000 was still to his credit in plaintiff bank, the forger drew out substantially all of that amount, and among his drafts on that fund was a check for |2,400 on plaintiff bank to the order of the person whose name he had forged to the check cashed at defendant bank. *3 United States Nat. Bank v. National Park Bank, 59 Sun, 495,, 13 N. y. Supp. 411, affirmed (on the opinion of tlie court below) in 129 N. Y. 647, 29 N. E. 1028; Bank of Commerce v. Union Bank,, 3 N. Y. 236; National Park Bank v. Seaboard Bank, 114 N. Y. 28,. 20 N. E. 632. 4i Canal Bank v. Bank of Albany, 1 Hill (N. Y.) 287, 294; Nas- sau Bank v. National Bank of Newburgh, 159 N. Y. 456, 54 N. B.. 66, affirming 32 App. Div. 268, 52 N. Y. Supp. 1118, and 34 App. D'iv. 623, 54 N. Y. Supp. 1110; Rapp v. National Security Bank,. 136 Pa. St. 426, 20 Atl. 508; Green v. Purcell Nat. Bank, 1 Ind.. Ter. 270, 37 S. W. 50. (266) Ch. 8J FORGED OR ALTERED PAPER. § 166- This check he deposited In defendant bank to the credit of such person, and defendant collected it from plain- tiff before it had any knowledge of the forgeries. It was held that defendant bank was not liable to plaintiff bank for the amount of the |2,400 check on plaintiff.*^ In the opinion in this case, the court applies the rule that "when money has been received by a person in good faith, in the usual course of business, and for a valuable consideration, it cannot be pursued into his hands by one from whom it has been obtained through the fraud of a third person. If it has been used, as is claimed in the present case, to pay an indebtedness owing by the third person, with innocence in the re- cipient, there is a consideration for its payment by him, which, despite the fraud through which the money was obtained, and for reasons based upon policy and the need for such security in ordinary commercial trans- actions, supports and protects its possession against the world."*" On the question whether the deposit by the forger of the good check on plaintiff bank in defendant bank to the credit of the one from whose account in the latter bank he had previously received the same amount on a forged check constituted a payment of the claim of that bank against him by reason of such forgery, the said bank at the time having been ignorant of the *5 Nassau Bank v. National Bank of Newburgh, 159 N. Y. 456,, 54 N. E. 66, affijmlng 32 App. Div. 268, 52 N. Y. Supp. 1118, and 34 App. Div. 623, 54 N. Y. Supp. 1110. 46 Citing Justh. v. National Bank of Commonwealth, 56 N. Y. 478; Stephens v. Brooklyn Board of Education, 79 N. Y. 183; Hatch V. Fourth Nat. Bank, 147 N. Y. 184, 41 N. E. 403. (267) § 166 BANK COLLECTIONS. [Qh. 8 forgery, the court says : "Taylor was a debtor, by rea- son of his forgeries, as well to those who were injured in their property rights thereby, as to the law for his criminal act; and it is of no conceivable importance, in my opinion, that the existence of the fact of indebt- edness was not known at the time when he sought to make reparation by repaying the moneys feloniously taken. Having made the payment, he could not reclaim it, and no interest in the money remained in him. It satisfied the claim which the bank undoubtedly possessed against him, and the discovery or knowledge of such a claim was not necessary to its existence." A collecting bank may obligate itself to pay the dif- ference between the original amount of a draft and the amount as fraudulently altered and raised, by an offer to the drawer bank, accepted by it, to pay such differ- ence if the draft was returned with an aflldavit of the true amount, and the matter not made public, which conditions were all complied with by the drawer;*^ but an agreement of this kind is rescinded by a direc- tion from the drawer to either pay the difference as agreed, or return the draft and affidavit, followed by a return thereof, together with a refusal to pay.*® Where the drawee paid, by mistake, a fraudulently raised draft, to a bank holding it for collection, it may 47 National Bank of Commerce v. Manufacturers' & Traders' Bank, 122 N. Y. 367, 25 N. B. 355. 48 National Bank of Commerce v. Manufacturers' & Traders' Bank, 122 N. Y. 367, 25 N. E. 355. On this state of facts, an action for money had and received could not be maintained by the drawer bank against the collect- ing bank. Id. (268) Cll. 8] FORGED OR ALTERED PAPER. § 167 sue such bank for the overpayment, after a demand and a refusal to refund, without tendering back the paper itself.*" i 167. Bank's agency undisclosed. Where the money is received on forged or raised paper by a collecting bank ostensibly as owner, without dis- closing its true relation to the paper as bailee or so- called agent for collection, it is uniformly held account- able as for money received by mistake.^" Consequently it has been held that a collecting bank, which was the last of several indorsers of a draft pay- able to order, the first of M'hom was ostensibly the payee whose name had been forged, having received pay- ment from the drawee on presentment without disclos- ing its agency, must repay the amount as money re- ceived by mistake on an instrument to which it had no title, though it was not notified of the forgery for two months after it had turned over the money to its prin- cipal.^^ In this case, in answer to the argument that, the equities of the parties being equal, the defendants, having possession, must prevail, the court states : "No doubt the parties were equally innocent in a moral point 49 Metropolitan Nat. Bank v. Merchants' Nat. Bank, 182 111. 367, 77 111. App. 316, affirmed. See, also, 'Brewster v. Burnett, 125 Mass. 68, where it was held that a purchaser of counterfeit United States bonds need not return them before suing for the amount paid therefor. To same effect is Kent v. Bornstein, 12 Allen (Mass.) 342, with regard to the return of a counterfeit bank bill, 50 See cases cited in notes 51-54, infra. 51 Canal Bank v. Bank of Albany, 1 Hill (N. Y.) 287. The payee of the draft was not disqualified by interest from testifying for plaintiffs in such case. Id. (269) :§ 167 BANK COLLECTIONS. [Ch. 8 of view. The conduct of both was bona fide, and the negligence, or rather misfortune, of both, the same. It was the duty, or, more properly, a measure of prudence, in each to have inquired into the forgery, which both omitted. But this raises no preference at law or in equity in favor of the defendants, but against them. They have obtained plaintiff's money without considera- tion; not as a gift, but under a mistake." Proof of a custom of collecting banks not to disclose their agency on the paper is not admissible to charge the drawee of a forged draft, who paid the same to the collecting bank, with notice of the fact that such bank was merely an agent, though the agency was not dis- closed, in the absence of proof of a further custom of banks not to collect paper as principals."^ The supreme court of Illinois has recently rendered a decision involving the effect of the undisclosed agency •of the receiving bank both to collect and clear for the initial bank. In that case the indorsements on a raised ■draft, following an indorsement by the payee, for de- posit, to the American Trust & Savings Bank, were as follows : "American Trust & Savings Bank. Paid Feb. 14, 1894. Paid through the Chicago Clearing House to Metropolitan National Bank." The first-named bank was not a member of the clearing house association, and its paper was customarily cleared through the second- named bank, but the drawee bank (plaintiff) had paid the draft as raised to the Metropolitan (defendant) three days before the discovery of the fraud, and there was no evidence that prior to such discovery plaintiff 52 Canal Bank v. Bank of Albany, 1 Hill (N. Y.) 287, 294. (270) i(]h. 8] FORGED OR ALTERED PAPER. g lf,9 knew that the defendant was the clearing agent for the American, or was its collecting agent. It was held that the indorsements passed title to the draft to the defend- ant, and did not make it merely agent for collection.^^ § 168. Effect of certification of paper by drawee bank. The certification by the drawee bank of a draft merely vouches for the genuineness of the signature of the drawer, and the existence of sufficient funds of liis at the bank to pay the draft. It does not warrant the genuineness of the body of the instrument, and, in case the draft Avas raised before certification, will not prevent the drawee bank from recovering the difference between the original and altered amount from a bank to which it paid the amount without knowledge of the alteration.^* Recovery in such cases is based on the double ground of mistake and want of consideration.®^ § 169. Ratification and waiver. The acts of the bank may be waived or ratified.®'' 53 Metropolitan Nat. Bank v. Merchants' Nat. Bank, 182 111. 367, :55 N. E. 360, affirming 77 111. App. 316. 5* Metropolitan Nat. Bank v. Merchants' Nat. Bank, 182 111. 367, 55 N. B. 360, affirming 77 111. App. 316. On effect of certification of check, in general, see Merchants' Bank v. State Bank, 10 "Wall. (U. S.) 604, 647. As to liability of bank after certification of raised check and sub- .sequent statement to a purchaser that the certification was good, see Clews v. Bank of New York National Banking Ass'n, 114 N. T. 70. 55 Metropolitan Nat. Bank v. Merchants' Nat. Bank, 182 111. 367, .55 N. E. 360, affirming 77 111. App. 316. 58 As to ratification or adoption of forged signature in general, see Greenfield Bank v. Crafts, 4 Allen (Mass.) 447; Wellington, v. (271) § 169 BANK COLLECTIONS. [Ch. 8 Thus, tHe payee of a government check, payable to or- der, ratifies the action of a bank in collecting it on a forged indorsement of her name, by accepting from the wrongdoer in settlement, with full knowledge of the facts, a part of the proceeds of the check and a note.^^ Jackson, 121 Mass. 157; Howard v. Duncan, 3 Lans. (N. Y.) 174,— holding that a ratification may take place, though there was no agency or facts creating an estoppel in pais, and no new considera- tion. Ratification or adoption of a forged signature may take place where the proceeds of the instrument are used with knowledge of the forgery. Ballston Spa Bank v. Marine Bank, 16 Wis. 120. Ratification also takes place if the person whose name was forged accepts indemnity or security against the forgery. Pitz- patrick v. School Commissioners, 7 Humph. (Tenn.) 224; Jones v. Hamlet, 2 Sneed (Tenn.) 256; Bell v. Waudby, 4 Wash. 743. Mere silence is not a ratification. California Bank V. Sayre, 85 Cal. 102; De Land v. Dixon Nat. Bank, 111 111. 323; Walters v. Munroe, 17 Md. 150. 57 Hughes V. Neal Loan & Banking Co., 97 Ga. 383, 23 S. B. 823. Ratification by payee of payment by maker on forged indorse- ment of former's name, see ante, § 162. (272) Ch. 9] ACTIONS AGAINST BANK. CHAPTER IX. ACTIONS AGAINST BANK FOR NEGLIGENCE. § 170. Right of action in general. 171. Surrender of paper as condition precedent to action. 172. Limitation of action. 173. Deelaration or complaint. 174. Answer. 175. Presumptions and burden of proof. 176. Admissibility of evidence. 177. Pleading and proof — Variance. 178. Matters admissible under general denial. 179. Verdict and judgment. The cause of action for failure to collect is primarily one for negligence quasi ex contractu, and not on the contract. Consequently the cause of action seems to be unassignable. Where the initial collecting bank is held liable for the de- faults of its correspondents, the owner's right of action for negligence of the correspondent is against the initial bank only, which has a remedy over against the correspondent. Where the correspondent is held to be the agent of the owner, the latter's right of action for its negligence is against it only. A tender or surrender of the paper to the bank is not a condition precedent to a suit and recovery against it for neg- ligence. Where the action proceeds as for a breach of the contract to collect, the contract should be alleged in the complaint, and the relation of the parties shown. The complaint should also show damage to plaintiff. The solvency of a party discharged by the negligence of the bank is sufficiently stated in an alle- (2Y3) 19 § 170 BANK COLLECTIONS. [Ch. 9 gation that he was in reputable credit, and continued in business. An answer attempting to negative liability under a custom or mode of dealing with plaintiff must show his knowledge of the custom, and a continuing agency for him. The burden of proof is on plaintiff to show negligence and loss. He must show the solvency of parties discharged by the negligence of the bank, and the insolvency of the remain- ing obligors. The holder at the time of suit is presumed to have been the holder at maturity of the paper. Parol evidence of the contents of a placard claimed to form part of the contract is admissible after notice to the bank to produce it, and a failure of the bank to do so. The statutes of limitations are also admissible to show that the claim had become barred by the negligence of the bank. Insolvency of the parties may be proved by reputation and lack of property. Surplusage and matters not directly in issue need not be proved. Evidence in mitigation of damages may be shown under a general denial. So may evidence of a waiver of the require- ments of the law merchant. To sustain a judgment for plaintiff for a failure to give notice of dishonor, a special verdict must find that notice was not given, or facts from which the court can draw that con- clusion as a matter of law. § 170. Right of action in general. Wlu'it' the depositor of the paper for collection and the collectini;- bank are the only parties in any way con- cerned in the collection, the right of such depositor to sue the hank for negligence in making or failing to make the collection is self-evident. But the cause of action is for negligence or tort, quasi c.r contractu, and (274) Ch. 9] ACTIONS AGAINST BANK. ^ § l7o is not oil contract.^ For this reason, it is doubtful whetlier a cause of. action for negligence in not taking the steps necessary to charge an indorser is assignable.^ But, admitting the assignability of such a cause of ac- tion, an assignment of it is not effected by an assign- ment of the indorsed instrument, together with tlie mortgage securing it.^ The action is usually brought bv some party to the paper, but one in possession of a promissory note in- dorsed in blank by the payee thereof may sue the col- lecting l)ank for failure to protest in due time and give notice to the indorsers, though his name is not on the note, and defendant received it from its correspondent with a special indorsement for collection.* In those jurisdictions holding the initial bank liable for the defaults of its correspondents, the owner's right of action for negligence of the correspondent is against 1 Merchants' Bank of Baltimore v. Bank of Commerce, 24 Md. 12, 52; Bank of Utlca v. McKlnster, 11 Wend. (N. Y.) 473; Borup T. Nlninger, infra. Holder may sue bank before suing indorser, see ante, § 72. 2 Borup V. Nininger, 5 Minn. 523, 539 (Gil. 417, 433), citing Gard- ner V. Adams, 12 Wend. (N. Y.) 2fl7; People v. Tioga Common Pleas, 19 Wend. (N. Y.) 73; People v. Gibbs, 9 Wend. (N. Y.) 29; North V. Turner, 9 Serg. & R. (Pa.) 244; O'Donnel v. Seybert, 13 Serg. & R. (Pa.) 54. In Bank of Utica v. McKinster, 11 Wend. (N. Y.) 473, it is held that where a note was transferred by a debtor, as collateral, un- der an agreement for a return thereof to the debtor in case of its nonpayment, and was thereafter deposited by the pledgee in a hank for collection, the debtor and not the pledgee was the proper party to sue the bank for negligence in failing to give notice of nonpayment 3 Borup V. Nininger, 5 Minn. 523 (Gil. 417, 433). 4 Cotton V. Union Bank, 15 La. 369. (275) § 171 . BANK COIX-BCTIONS. [Ch. 9 the initial bank only.^ In such case, as we have seen, the initial bank has a remedy by action over against the correspondent.® In the jurisdictions holding that the correspondent is an agent of the owner, and not of the initial bank, the owner's cause of action for negli- gence 'of the correspondent is against the correspondent only.''' § 171. Surrender of paper as condition precedent to action. Tender back of the paper is not a condition precedent to a recovery against a bank sued for negligence in fail- ing to correct it.* Nor is the return of the draft to the defendant bank a condition precedent to an action against it by the drawer, who paid the draft by mistake in ignorance of the fact that defendant had been negli- gent in failing to collect from the drawee; such action being for negligence, and not on the draft.^ In a Louisiana case, however, it was ordered that = See ante, §§ 86-98. 6 See ante, § 120. ^ See ante, §§ 99-115. See, also. First Nat. Bank of Crown Point V. First Nat. Bank of Riclimond, 76 Ind. 561; Guelieh v. National State Bank of Burlington, 56 Iowa, 434. A dictum of Nelson, C. J., in Bank of Orleans v. Smith, 3 Hill (N. Y.) 560, is to the effect that the owner may sue either the Initial bank or its correspondent for the negligence of the latter in making the collection. Liability of correspondent bank to owner for proceeds, see ante, §§ 136, 137. 8 First Nat. Bank of Meadville v. Fourth Nat. Bank of New York City, 89 N. Y. 413. Necessity of tender of forged or altered paper to bank before suit to recover payment made, see ante, § 166. s> Merchants' Bank of Baltimore v. Bank of Commerce, 24 Md. 12, 52. (2T6) Oh. 9] ACTIONS AGAINST BANK. § 172 execution be not issued on a judgment against the bank till plaintiff had delivered the note to it or deposited it with the clerk, together with an assignment of all rights thereon.^" § 172. limitation of action. There is a dearth of authorities on the question of limitations with respect to actions against banks for negligence in collecting; but, since such actions are technically in tort, quasi ex contractu, the statute be- gins to run from the time of the default, and its running is not postponed until actual damage occurs." There are a few other authorities that may be of service by way of analogy. Thus, as to actions against collection agencies for the negligence or misconduct of their collecting attorney, the statute of limitations be- gins to run from the time the attorney received the pro- ceeds of the paper.i^ If, however, the attorney was guilty of fraud, as where he fraudulently executed a satisfaction of judgment on the claim, and the collec- tion agency, in response to frequent inquiries of the owner, reported that the claim was uncollectible, the statute does not begin to run until the discovery of the fraud.^^ 10 Pritcliarcl v. Louisiana State Bank, 2 La. 415. 11 Angell, Limitations, p. 123 ; Wood, Limitation of Actions, p. 362; Bank of Utica v. Childs, 6 Cow. (N. Y.) 238. In this case the action was by the collecting bank against its notary, for whose default the bank had been compelled to respond to the owner of the paper. See, also. Miller v. Adams, 16 Mass. 456. That statutes of limitation are admissible in evidence to show that claim was lost through negligence of the bank, see post, § 176. 12 Rhlnes' Adm'rs v. Evans, 66 Pa. St. 195. 13 Morgan v. Tener, 83 Pa. St. 305. (2Y7) § 173 BANK COLLECTIONS. |Ch. 9 If the negligence of the bank was such as to charge it with conversion of the paper or proceeds, the statute would begin to run from the time of the conversion." § 173. Declaration or complaint. Where the action proceeds on the theory of a breach of a contract to collect, the declaration or complaint must state the contract. An averment that plaintiff had retained and em- ployed defendant to collect a draft for a commission and reward to be paid to defendant, followed by an averment of defendant's acceptance of the draft for pur- poses of collection, in pursuance of such retainer and employment, is a sufficient statement of the contract to collect." The so-called relation of principal and agent is also sufficiently shown in a complaint stating that plaintiff delivered a draft to a collection agency, procured its indorsement, and "caused said draft so indorsed to be sent by mail, together with a statement" of the account of the firm on which it was drawn, to the defendant bank 14 See Parker v. Harden, 121 N. C. 57, 28 S. E. 20; Fishwick's Adm'r v. Sewell, 4 Har. & J. (Md.) 393; Quinn v. Gross, 24 Or. 147. That an action by a receiver of a bank for proceeds of collec- tions of paper sent to a trust company is an action for conversion within the California statutes of limitation, see Hawkins v. State Loan & Trust Co., 79 Fed. 50. But if possession was obtained lawfully, a demand is necessary before an action for conversion, and the statute runs from the time of the demand. See Haire v. Miller, 49 Kan. 270, 30 Pac. 482; Montague v. Sandwich, 7 Mod. 99. 15 American Express Co. v. Pinckney, 29 111. 392, 407. (278) Ch. 9] ACTIONS AGAINST BANK. § 173 for collection.^ '^ And a declaration in an action against a bank for failure to protest a note, which alleges that it was delivered to defendant for collection before its maturity, is sufficient as to the time of the inception of the relation.i^ When there was a stipulated consideration for the contract to collect, it should be stated ; but where there was no express contract as to the compensation of the bank, the implied consideration need not be stated.^* But, assuming that it is necessary to set out the implied agreement as to consideration, it has been held that a complaint, defective for want of allegations of an im- plied contract on the part of the bank to follow in- structions, and on the part of the owner to pay a rea- sonable compensation, is amendable.^ ^ The complaint must show damage to plaintilS.^" So, a petition in a suit for failure to collect, which does not allege that the defendant could have collected the amount of the paper at any time after it received it for collec- tion, or that an alleged negligent surrender of the paper to the payor prevented collection, or that the payor re- fused to redeliver the paper, or that the alleged negli- gence caused plaintiff to lose his claim against the 16 Finch V. Karste, 97 Mick. 20, 56 N. W. 123. IT Roanoke Nat. Bank v. Hambrick, 82 Va. 135. 18 Matters implied by law need not be alleged or proved, see post, § 177. A complaint in tort against a collecting bank for wrongful con- version of a note need not allege a consideration for the under- taking to collect. Keyes v. Bank of Hardin, 52 Mo. App. 323, 330. 18 Central Georgia Bank v. Cleveland Nat. Bank, 59 Ga. 667, 674. 20 Morris v. Enfaula Nat. Bank, 106 Ala. 383, 18 So. 11. (279) § 174 BANK COLLECTIONS. [Ch. 9 payor, is defective.^^ But a declaration alleging a neg- ligent retention of a draft, without efforts to collect, until after the drawee became insolvent, so that it was impossible to collect the claim, sufficiently shows that defendant's default caused loss to plaintiff .^^ That the drawer of the paper was solvent up to a certain time is sufficiently stated in a complaint alleg- ing that, up to that time, he remained in reputable, credit and continued in business.^^ Further, ' on the question of solvency, it has been held that the complaint in an action for failing to collect before the drawee became insolvent need not negative any knowledge on the part of plaintiff that the drawee was in failing cir- cumstances.^* § 174. Answer. An answer attempting to negative liability under a custom or mode of dealing with plaintiff must show plaintiff's knowledge of the custom, or a general con- tinuing agency. So, an answer averring a custom of plaintiff to send to defendant for collection, at intervals, drafts on a certain company, and a custom of defendant not to present any of such drafts for acceptance, but not averring that plaintiff knew of the custom not to present them for acceptance (all such drafts prior to the one in suit having been paid without such present- 21 Farmers' Bank & Trust Co. v. Newland, 97 Ky. 464, 31 S. W. 38. 22 Pinch V. Karste, 97 Mich. 20, 56 N. W. 123. 23 Citizens' IN at. Bank of Lawrenceburg v. Third Nat. Bank of Greensburg, 19 Ind. App. 69, 49 N. B. 171, distinguishing West v. Saint Paul Nat. Bank, 54 Minn. 466, 56 N. W. 54. 24 Finch V. Karste, 97 Mich. 20, 56 N. W. 123. (280) •Ch. 9] ACTIONS AGAINST BANK. § 175 ment), and not averring an express agreement in regard to such drafts, or that plaintiff constituted defendant its continuing agent for tlieir collection, does not shoAv a continuing agency, but that such item constituted a separate transaction, and that, consequently, defend- ant's custom not to present for acceptance was not binding on plaintiff.^^ § 175. Presumptions and burden of proof. To charge a bank with liability for negligence in col- lecting or failing to collect paper, the owner has the burden of proof, and must show that the paper was col- lectible, and that the loss of it was due to the bank's neg- ligence.^^ And, to hold the collecting bank liable for negligence, some actual loss by reason thereof must be shown.^^ Thus, no damages can be recovered for the 25 Citizens' Nat. Bank of Lawrenceburg v. Third Nat. Bank of •Greensturg, 19 Ind. App. 69, 49 N. B. 171. Answer in suit to charge collecting bank with negligence in failing to present a sight draft for acceptance held not to show that the drawer had no right to draw. Citizens' Nat. Bank of Lawrenceburg v. Third Nat. Bank of Greensburg, 19 Ind. App. 69, 49 N. E. 171. 26 Sahlien v. Bank of Lonoke, 90 Tenn. 221, 232, 16 S. W. 373. Where part of a claim sent to an attorney for collection has "been collected, the principal, in order to charge the attorney with the remainder, must show that such remainder was collectible. Bruce v. Baxter, 7 Lea (Tenn.) 477, 482. Presumptions as to title to paper, see ante, § 14. Presumption of negligence from loss of paper, see ante, § 39. Presumption that indorser will take advantage of his discharge from liability, see ante, § 72. 2THallowell v. Curry, 41 Pa. St. 322; Finch v. Karste, 97 Mich. -20, 56 N. W. 123; Farmers' Bank & Trust Co. v. Newland, 97 Ky. -464, 474, 31 S. W. 38; Indig v. National City Bank of Brooklyn, (281) § 175 BANK COLLECTIONS. [Cii, 9, alleged negligence of a bank in failing to realize on a draft after acceptance, and before the insolvency of the drawee, if the evidence fails to show a reasonable prob- ability that the draft would have been paid if the drawee had been pressed for payment during such time.^® For the same reason, one suing a bank for neg- ligence in failing to take steps to charge an indorser- must show the solvency of the indorser and the in- solvency of the maker.2® A little broader statement of the rule is that, before the owner can recover the face of the paper from a bank whose negligence has caused the discharge of one solvent party to the paper, he must show that the re- maining parties are insolvent.^" In Louisiana, how- ever, the rule is different.^^ And in Mississippi it has- been held that, in the absence of any showing whatever as to the solvency of the drawers in an action for neg- ligence in failing to charge them, they will be presumed to be solvent.^^ But the burden of proof as to an actual loss to plain- so N. Y. 100, 104; Givan v. Bank of Alexandria (Tenn. Ch.) 52 S. W. 923; Bruce v. Baxter, 7 Lea (Tenn.) 477; Collier v. PuUiam, 13 Lea (Tenn.) 114, 118; Toole v. Durand, 7 Rob. (La.) 363, 368. 28 Crouse v. First Nat. Bank of Penn Yan, 137 N. Y. 383, 33 N.- E. 301, affirming 61 Hun, 618, 15 N. Y. Supp. 408. aoBorup v. Nininger, 5 Minn. 523 (Gil. 417). But see Coghlan v. Dinsmore, 22 N. Y. Super. Ct. 453, where it was held that a bank sued for not taking the necessary steps to charge indorsers has the burden of showing that they are insolvent. 30 Bank of Mobile v. Huggins, 3 Ala. 206. 31 Durnford v. Patterson, 7 Mart. (La.) 460; Crawford v. Louisi- ana State Bank, 1 Mart. (La.; N. S.) 214; Montillet v. Bank of: United States, 1 Mart. (La.; N. S.) 365. 32 Capital State Bank v. Lane, 52 Miss. 677, 681. (282) Ch. 9] ACTIONS AGAINST BANK. § 175 tiff is sustained by evidence of the obligor's insolvency after he had given a mortgage on his property to de- fendant bank to secure its own claini against him, and evidence of the return of plaintiff's claim unpaid; no evidence having been adduced by defendant to show that the claim was still collectible.^^ The holder of a bill at the time of a suit by him against the collecting bank for negligence in making present- ment and protest without allowing grace is presumed to have been the holder at the maturity of the paper.^* i 176. Admissibility of evidence. The decisions available on the questions relating to the admissibility of evidence in actions against collect- ing banks for negligence are based for the most part on some particular state of facts involved in each case.^* Thus, it has been held that parol evidence of the con- tents of a placard posted in the bank offering to make collections on stated terms is admissible after notice to the bank to produce it, and the failure of the bank to do so, without evidence that plaintiff saw the placard and relied on it.^" Also, that letters written by plain- tiff to the obligors on the paper after it had been re- turned to plaintiff' by the bank are admissible to show diligence on the part of plaintiff'.^'^ 33Fincli V. Karste, 97 Mich. 20, 56 N. "W. 123. 3* Georgia Nat. Bank v. Henderson, 46 Ga. 487, 12 Am. Rep. 590. 35 Proof of custom, see ante, § 10. Matters admissible under general denial, see post, § 178. seWingate v. Mechanics' Banli, 10 Pa. St. 104, 107. 31' Diamond Mill Co. v. Groesbeeck Nat. Bank, 9 Tex. Civ. App. 31, 29 S. W. 169. (283) § 177 BANK COLLECTIONS. [Ch. 9 In an action against the initial bank, which had agreed to "collect," for negligence of its correspondent in another state in failing to collect or give notice of dishonor or return the paper, the statutes of that state are admissible in evidence to show that the bank held the note until action thereon was barred by the statute of limitations.^^ That one is insolvent may be proved by evidence that such was his general reputation in the community where he resides ;^^ and an execution against the maker, and a return of nulla honxv and a certificate of the parish recorder that the maker had no property standing in his name in the parish of his domicile, are admissible to show insolvency of the maker.*" § 177. Pleading and proof — Variance. An allegation that, when the paper was delivered to the bank for collection, the owner instructed the bank to take all necessary steps to hold the indorsers in case of nonpayment, is surplusage, and need not be proved, since it states merely what the law implies in the ab- sence of express instructions.*^ Nor is it necessary to prove matters not directly- in issue. Thus, in a suit to recover from a bank the cost of substituting new trans- fers of land certificates for transfers negligently lost by 3s Wingate v. Mechanics' Bank, 10 Pa. St. 104. 39 West V. St. Paul Nat. Bank, 54 Minn. 466, 56 N. W. 54; Ninin- ger V. Knox, 8 Minn. 140 (Gil. 110); Burr v. Willson, 22 Minn. 211; Angell V. Rosenburg, 12 Mich. 241, 251; Bank of Middlebury v. Town of Rutland, 33 Vt. 414 ; State v. Cochran, 2 D'ev. (N. C.) 63. *" Eichelberger v. Pike, 22 La. Ann. 142. *i Jagger v. National German-American Bank, 53 Minn. 386, 55 N. W. 545. (284) Ch. 9] ACTIONS AGAINST BANK. § 178 the bank after their delivery to it to collect the amount for which they were given as collateral, plaintiff need not prove the execution of the transfers, that not being in issue.*^ But, in an action against a bank for fail- ing to notify an indorser, where the fact of notice to the bank of the residence of the indorser was in issue, evi- dence, of special instructions given to the bank at the time the paper was left for collection, as to the resi- dence of the indorser, was admissible.^* § 178. Matters admissible under general denial. Evidence in mitigation of damages is admissible un- der a general denial.'** So, too, a bank sued for negli- gence in not presenting a sight draft for acceptance may show, under a general denial, that the require- ments of the law merchant in such case had been dis- pensed with by special agreement; the complaint hav- ing alleged an agreement to collect and to promptly present for acceptance, as required by the rules of the law merchant and the custom of banks.*^ But a de- fense to a suit by the holder for failure to protest and give notice, that defendant received the paper from its correspondent under special indorsement without no- tice of any title in plaintiff (whose name was not on the paper), and that the correspondent was largely in- 42 First Nat. Bank of Birmingham v. First Nat. Bank of New- port,' 116 Ala. 520, 22 So. 976. *3 Nininger v. Knox, 8 Minn. 140 (Gil. 110) . a Citizens' Nat. Bank of Lawrenceburg v. Third Nat. Bank of Greensburg, 19 Ind. App. 69, 49 N. E. 171. 45 Citizens' Nat. Bank of Lawrenceburg v. Third Nat. Bank of Greensburg, 19 Ind. App. 69, 49 N. B. 171. (285) § 179 BANK COLLECTIONS. [Ch. 9 debted to defendant, is not available unless specially pleaded. It cannot be shown under a general denial.*" § 179. Verdict and judgment. Tn an action against a bank for negligence consisting principally of a failure to give proper notice of nonpay- ment, a special verdict which does not find that notice was or was not given, or any facts from which the court could pass upon it as a question of law, will not sustain a judgment for plaintiff.*^ 40 Cotton V. Union Bank, 15 La. 369. 17 Locke V. Merchants' Nat. Bank, 66 Ind. 353, 364. See, also. Gazette Printing Co. v. Morss, 60 Ind. 153. (286) €h. 10] MEASURE OF DAMAGES. CHAPTER X. MEASURE OP DAMAGES. § 180. Compensatory damages in general. 181. Nominal damages. 182. Face value of paper. 183. For failure to charge indorsers. 184. Costs of unsuccessful suits against indorsers. 185. For conversion. 186. Recovery of interest. 187. Matters that may he shown in mitigation of damages. The measure of damages for negligence of the collecting bank is the actual loss occasioned by its default. This rule applies as well between the initial and correspondent banks, as be- tween the former bank and the owner. It also applies where the paper itself was lost by the collecting bank. In some cases, nominal damages are allowed for negligence resulting in the discharge of some of the parties to the paper, if proper steps had been taken as to remaining solvent parties. The right to recover the full face value of the paper depends on the reasonable probability of collection had due diligence been used. The bank may be charged with the full value of the paper where its negligence resulted in the discharge of the drawer, or of the drawee. The full face value of the paper is also the measure of damages where the bank had secured, or fraudulently obtained payment of, its own claim against the obligor, to the exclusion of the rights of its customer, the owner of the paper. For a negligent failure to properly charge the indorsers, the bank is liable, prima facie, for the full value of the paper, (28T) § 180 BANK COLLECTIONS. [Ch. 10' if the remaining parties are insolvent. And a remote and contingent possibility of recovery against parties not discharged will not prevent a recovery of the full value of the paper. The costs of unsuccessful suits against indorsers discharged by the negligence of the bank do not form a proper element of damage, and are not recoverable. If the acts of the bank amount to a conversion, the measure of damages is the full value of the paper. Interest cannot be recovered unless some pecuniary benefit has, or could have, accrued to the bank from the possession of the paper or its proceeds. The bank may show, in mitigation of damages, the solvency of the maker, the insolvency of the indorser discharged by its negligence, or any other fact that will lessen the actual loss , to the owner. § 180. Compensatory damages in general. The collecting bank is liable only for the actual loss occasioned by its negligence. In other words, it can be required to pay indemnity, and no more, for the loss caused by its fault.^ So, where the correspondent bank, which was ordered to return a draft if unpaid, gave the initial bank erroneous information that the draft had been paid, whereupon the latter paid the amount, less certain charges, to the drawer, the measure of dam- ages in an action by the initial bank against its corre- iBank of Mobile v. Huggins, 3 Ala. 206; First Nat. Bank of Meadville v. Fourth Nat. Bank of New York City, 77 N. Y. 320, 89 N. Y. 412; Borup v. Nininger, 5 Minn. 523 (Gil. 417); American Express Co. v. Parsons, 44 111. 312; Mott v. Havana Nat. Bank, 22 Hun, 354; Omaha Nat. Bank v. Kiper (Neh.) 82 N. W. 102; Givan v. Bank of Alexandria (Tenn. Ch.) 52 S. W. 923. (288) Ch. 10] MEASURE OF DAMAGES. § 181 spondent is the amount so paid out by it ; that amount of loss having been shown.^ On the same theory of compensatory damages, a bank which negligently lost transfers of land certificates, sent to it for collection, by one holding them as collateral, is chargeable, as an element of damages, with the neces- sary costs and expenses of suits to establish such trans- fers, not exceeding their value as security, though the sender could have avoided such expenses if he had re- corded his transfers, as the failure to record in no way contributed to the loss of the transfers; and is also chargeable with all expenses of procuring substitutes, including all necessary traveling expenses and attor- neys' fees; but is not chargeable with the expense of foreclosing a mortgage given to secure the same debt by the original debtor after re-establishment of the transfers.^ § 181. Nominal damages. In some cases where the bank has been guilty of a technical breach of duty, but no injury has resulted, merely nominal damages are allowed. No more than nominal damages can be recovered by the payee of a draft from the collecting bank for its failure to present for payment a check given in payment of the draft, un- less it be shown that the drawer of the draft, against whom a remedy had been preserved by the bank, is in- 2 Merchants' & Manufacturers' Bank v. Stafford Nat. Bank, 44 Conn. 564. 3 First Nat. Bank of Birmingham v. First Nat. Bank of New- port, 116 Ala. 520, 22 So. 976. (289) 20 § 182 BANK COLLECTIONS. [(Jh. JQ solvent.* And the sending bank is entitled to nominal damages only, for negligence of the correspondent bank in sending the paper directly to the bank primarily liable, where the agency had been renounced, and the plaintiff had acquiesced in the renunciation.^ § 182. Face value of paper. The right to recover the full amount of the paper from the bank on the ground of negligence in failing to collect depends on the reasonable probability of collec- tion had diligence been used in pursuing the obligor or notifying the owner of the paper,^ and is consequently a question of fact for the jury.'^ If there is a reasonable probability that the debt would have been collected but for the negligence of the collecting bank, the measure of damages is the amount of the claim.® The bank may be charged with the face value of the * First Nat. Bank of Meadville v. Fourth. Nat. Bank of New York City, 77 N. Y. 320, 33 Am. Rep. 618, 89 N. Y. 412. Aliter if the drawer was discharged by the negligence of the bank. See next section. i; First Nat. Bank of Evansville v. Fourth Nat. Bank of Louis- ville, 56 Fed. 967, 6 C. C. A. 183, 16 U. S. App. 1. 6 Selz V. Collins, 55 Mo. App. 55 ; Fahy v. Fargo, 63 Hun, 625, 17 N. Y. Supp. 344; Leinau v. Dinsmore, 41 How. Pr. (N. Y.) 97; Falling v. Fargo, 12 Wkly. Dig. (N. Y.) 121. 7 Selz v., Collins, 55 Mo. App. 55. See, also, Dyas v. Hanson, 14 Mo. App. 363; First Nat. Bank of Trinidad v. First Nat. Bank of Denver, 4 Dill. 290, Fed. Cas. No. 4,810. 8 Omaha Nat. Bank v. Kiper y mistake on forged papef, 266. INDORSEES, who entitled to notice of dishonor from bank, 120, 121. measure of damages for discharge of, 292. costs of suits against, as element of damage, 293. see, also, "Indorsement." INFORMATION, forwarding by initial to correspondent bank, 94. correspondent liable to initial bank for failure to disclose ma- terial facts, 179. INJUNCTION, against collection, revokes authority of bank, 55. INQUIRY, for lost paper, duty of collecting bank, 66, 67. INSOLVENCY, of bank terminates authority to collect, 54. of bank before collecting does not divest it of title once vested in It, 37. of bank before compliance with instructions to apply deposits in payment, 189. suspicion of insolvency of obligor bank does not justify rescis- sion of credit given for paper, 37. of draiwer of check on collecting bank, cancellation of prema- ture credit, 28. of sight draft, bank must give notice of nonacceptance to in- dorser, 118. and indorsers, presumptions, and burden of proof, 282. credit entered after, does not change relation of bank and cus- tomer, 185. of drawee, no excuse for failure to present for acceptance, 105. of obligor, effect of knowledge of fact by holder before deposit for collection, 63. INDEX. 349 INSOLVENCY— Cont'd. of initial bank before credit given by correspondent, title to pro- ceeds, 216. lien of correspondent on proceeds of collections, 213-224. of correspondent, does not relieve initial bank from liability, 178. of bank when paper was received prevents passage of title, 21. renders proceeds a trust fund, 227, 228. not a conversion, 209. knowledge of a suspicion of insolvency of correspondent does • not render bank negligent in selecting sucli correspond- ent, 133. preference for amount of proceeds of collection. 224. of collecting bank after remittance by check or draft, proceeds as a trust fund, 229. tracing and following proceeds into estate of insolvent collecting bank, 232. filing claim as general creditor does not waive right to prefer- ence, 245. what portion of assets of bank is impressed with trust for amount of proceeds of collections, 245. reclaiming from receiver uncollected checks taken when bank was known to be insolvent, 242, note, showing in mitigation of damages, 295. mistake as to solvency of obligor not ground for recovery of pay- ment, 194. pleading, 280. evidence of, 282, 284. INSTRUCTIONS, bank must follow, 47, 48. forwarding by initial bank to correspondent, 94. to take particular steps in collecting not a limitation of liability to such steps, 61. as to surrender or retention of bills of lading accompanying drafts, 69, 70. as to application of deposits to payment of depositor's paper, 75. as to extensions and renewals, 79, 80. not to protest, 116. for return of dishonored paper, 124, 125. allowing paper to be sent directly to drawee bank for collection, 136, 137. fraudulent disregard of, by cashier of correspondent, rights of initial bank, 180. 350 INDEX. INSTRUCTIONS— Cont'd. as to payment of proceeds, 201. with paper indorsed "for collection," negativing title in corre- spondent, or a right to a lien, 223. performance of, held to justify collecting bank in obtaining pref- erence for its own claim against obligor, 89. to remit in exchange negatives existence of trust where check is sent, and sending bank fails, 230. INTENTION, as factor in determining question of title to paper, 20, 21. INTEREST, collection of, 90. payment of as factor in determining title to paper, 22, 23. as element of damages, 294. IOWA, rule as to liability of initial bank for defaults of correspondents, 167. IRREGULAR DEPOSIT, Louisiana theory of relation between collecting bank and cus- tomer, 3, 4. ISSUE, matters not in issue need not be proved, 284. J- JOINT LIABILITY, correspondent banks not jointly liable to initial bank, 152. JUDGMENT, in action for negligence, 286. obtaining adjudication on claim as general creditor precludes enforcement of trust or preference, 245. JUDICIAL NOTICE, that banks have power to make collections, 45. of custom to accept certificates of deposit as casn In payment of collection, 85. to remit by check or draft, 192. JURISDICTION, of common law negatives trust relation between collecting bank and customer, 8. INDEX. 351 JURY, province of, whether bill was taken in payment of debt or for collection, 15, note, title to paper, 20. negligence of collecting bank, 95, 96. negligence in failing to seasonably return dishonored pa- per, 125. measure of damages, 290. K. KANSAS, rule as to liability of initial bank for defaults of correspondents, 168. KENTUCKY, rule as to liability of initial bank for defaults of correspondents, 170, KNOWLEDGE. of custom not essential to binding effect, 17. of material facts essential to ratification or waiver of negligence of bank, 98, 126-129. of dishonor not equivalent to notice, 118. drawee charged with knowledge of signature of drawer, 250. L. LACHES, see "Negligence." LADING, BILLS OF, see "Bills of Lading." LAW MERCHANT, source of banker's lien, 39, 40. waiver of rules of, may be shown under general denial, 285. LETTERS, as evidence, 283. LI-EN, of collecting bank on paper, 39-42. not affected by assignment by debtor lor benefit of creditors, 41, 42. 352 INDEX. LIEN— Cont'd. of bank on corporate funds for debt of agent of company, 202, note. of correspondent for debt of initial bank, 213. of bank on proceeds collected after filing by customer of petition in bankruptcy, 200, note. on proceeds of collections of national bank, by reason of accept- ance of its paper, dates from acceptance, 216. LIMITATION, of authority of collecting bank, in general, 46, 47. LIMITATION OF ACTIONS, for negligence of bank, 277. admissibility of s1)atute of limitations, 284. LIMITATION OP LIABILITY, for negligence in collecting, 60, 61. for negligence of correspondent, 177. LOCATIO OPERIS PACIENDI, nature of bailment for collection, 4, 5. LOST PAPER, liability of bank for loss, 64-67. presence in bank does not amount to, or excuse, presentment for payment, 112. LOUISIANA, rule as to liability of initial bank for defaults of correspondents, 173. M. MAIL, loss of paper in, liability of bank, 64-67. effect of abandonment of custom of giving notice of dishonor by mail, 119, 120. collecting bank cannot withdraw from mails its draft given in payment, 196. MAKER, collecting bank not agent of, 7. without funds, bank not authorized to pay paper, 10, 11. evidence of insolvency, 284. name forged, liability of collecting bank, 250. INDEX. 353 MALICE, bank not liable for malicious publication of protest by its no- tary, 144. MANDATE, bank as mandatary, 3. MARYLAND, rule as to liability of initial bank for defaults of correspondents, 164. MASSACHUSETTS, rule as to liability of initial bank for defaults of correspond- ents, 160. MASTER AND SERVANT, stipulation limiting liability of master for negligence, void as against public policy, 60. liability of bank for defaults of notary who is regular employe of bank, 143, 144. MATURITY, time of receiving payment, 78. credit entered before, not a payment or collection, 186. time of, negligence of collecting bank in determining, 108-110. of depositor's debt to bank as affecting lien of bank en his paper deposited for collection, 40. paper not matured not subject to garnishment or trustee process, 38, 39. transfer after, transferee not a bona fide holder, 204. MICHIGAN, rule as to liability of initial bank for defaults cf correspond- ents. 154. MINGLING FUNDS, depositor bound by general custom of banks, 17, 18. implied agreements permitting, between collecting banks, 140. effect on right to follow trust funds, 232. MINNESOTA, rule as to liability of initial bank for defaults of correspondents, 156. MISSISSIPPI, rule as to liability of initial bank for defaults ol correspondents, 173. 24 3S4 INDEX. MISSOURI, rule as to liability of initial bank for defaults of correspondents, 170. MISTAKE, liability of collecting bank, 95. certification of altered paper, 271. ground for correction of bank account, 26, note, payment by, 192-197. payment by drawer does not relieve correspondent from lia- bility to initial bank, 180. bank cannot withdraw from mails its check or' draft given in payment, 196, 197. recovery of payments, 192-197. recovery of payments made on forged or altered paper, 264. payment by indorser in ignorance of discharge may be re- covered back, 127. evidence, 197. MITIGATION OF DAMAGES, evidence admissible under general denial, 285. what may be shown, 295. MONEY, collecting bank as agent to receive payment, 6, 7. the only proper medium of payment of collections, 80-82. bank can take money only in payment, 80. MONEY HAD AND RECEIVED, recovery of money paid under mistake, 194. MONTANA, rule as to liability of initial bank for default of correspondents, 157. MORTGAGE, obtained by bank on property of obligor to prejudice of rights of owner of paper, 88. bank as trustee for collection may sue to foreclose in its own name, 50. MUNICIPAL BONDS, title does not pass on special deposit for collection, 21. INDEX. 355 N NATIONAL BANKS, have implied power to collect commercial paper, 45, 46. lien en proceeds of collections in hands of insolvent national • bank, on account of acceptance of its paper prior to insolvency, dates from time of acceptance, 216. NEiBRASKA, rule as to liability of initial bank for defaults of correspondents, 169. NEGLIGENCE, degree of care required of collecting bank, 59, 60. to charge parties to paper, 101, 102. in selection of agents and correspondents, 132, 133. where instructions were ambiguous, 48. ground for revocation of bank's authority, 55. contractual' limitation of liability. 60-62. as to medium of payment, 80. as to time and manner of receiving payment, 78. taking acceptance not according to tenor of hill, 106, 107. premature surrender of bills of lading accompanying draft, 69. premature protest of paper entitled to grace, 108-110. failure to give notice of dishonor, 117-121. enforcement of paper taken in payment, 122, 123. failure to seasonably return dishonored paper, 123-125. of correspondent bank, liability of initial bank, 147-179. limitation of liability for negligence of correspondent, 177. waiver, 180. of notary, liability of employing bank, 141-146. selecting drawee or obligor as subagent or correspondent, 133- 140. of collecting bank securing its own claim to exclusion of rights of owner of paper, 86-90. of cashier, liability of bank, 62, 63. of depositor of paper, when bank not liable, 63, 64. giving notice of forgery or alteration, 258. question for jury. 95. cause of action in general, 274. conditions precedent to actions for, 276. limitation of action for, 277. presumptions and burden of proof in general, 281. 356 INDEX. NEGLIGENCE— Cont'd. from loss of paper, 64-66. instructions as to presumption from loss of paper, 65. compensatory damages, 288. nominal damages, 289. face value of paper as measure of damages, 290. waiver, 97, 98, 126-129, 180. NEGOTIABILITY, destroyed by indorsement for collection, 29. promise to account for proceeds is not negotiable, 201, note. NEGOTIABLE INSTRUMENTS LAWS, check or draft not an assignment of fund, 77. antecedent debt constitutes value, 217. collecting bank indorsing generally is a general Indorser, 92. rule that indorsee under restrictive indorsement may transfer his rights as indorsee, 46, 47. rule that restrictive indorsement confers on indorsee right to bring any action that indorser could bring, 49. . instrument payable at bank is order on bank to pay same for ac- count of principal debtor, 73. presentment for payment must be made by holder or his agent, 108. days of grace abolished, 110. NEW JERSEY, rule as to liability of initial bank for defaults of oorrespendent banks, 153. NEW YORK, rule as to liability of initial bank for defaults of correspondent banks, 151. NOMINAL DAMAGES, see "Damages." NORTH CAROLINA. rule as to liability of initial bank for defaults of correspondents, 164. NORTH DAKOTA, rule as to liability of Initial bank for defaults of correspondent banks, 157. INDEX. 357 NOTARY PUBLIC, bank must use due care in selecting notary, 132, 133. liability of collecting bank for defaults of, 141-146. NOTES, bank cannot take payment in, 82. credit on receiving notes in payment is not a payment, 185. taking in payment does not make bank a trustee for amount of collection, 237, 238. charging amount to account of customer before insolvency does not create a trust, 239. NOTICE, judicial notice, see "Judicial Notice." of revocation of authority of collecting bank, 56, note. indorsement "for collection" is notice that title is in indorser, ,30, 220. of ownership of paper, liability of bank paying In violation of notice, 202, 206. that delivery of paper indorsed in blank was fof collection, 33. duty of bank on which check deposited for collection was drawn, to notify depositor of state of drawer's account, 28. of loss of paper, duty and liability of collecting bank, 66, 67. duty of correspondent bank to notify initial bank of material facts, 179. when correspondent a bona fide holder, though notified of title in owner, 218. correspondent bank with notice of title in depositor, not a bona fide purchaser from initial bank, 219-223. of ownership of proceeds, 201. from custom, 270. not to protest, 116. of dishonor, duties and liabilities of collecting bank, 117-121. what indorsers entitled to notice, 120, 121. when collecting bank entitled to notice as indorser, 120, 121. bank liable for failure to give notice, without prior suit against discharged indorsers, 121, 122. necessary showing in special verdict, 286. of forgery or alteration, 258. of facts putting customer on inquiry as to alteration, 262. O. OFFICERS, representation of bank by cashier, 62, 63. 358 INDEX. OFFICERS— Cont'd. estoppel of bank by acts of casliier, 16. when collecting bank not liable for fraud of president, 50, note. bank not liable as trustee for money collected and deposited by its president in his own name, 238. paying teller not authorized to receive deposit to take up paper held for collection, 75. when bank not bound by statement of collection teller that raised paper was all right, 263. liability of bank for defaults of notary who is also an officer of the bank, 143, 144. notary public acting in official capacity, liability of bank for his defaults, 144. presumption that some officer was present to receive payment of demand note payable at bank, 112. knowledge of insolvency of bank when paper was received, ef- fect on title to paper, 21. OHIO, rule as to liability of initial bank for defaults of correspondents, 153. OPINIONS, of merchants not competent evidence of custom, 178. OPTION, of bank to discount or collect, 36. of drawee to sue bank or owner for money paid by mistake, 193, 194. ORDER, to "deliver" proceeds equivalent to order to "pay," 201. OVERDRAFTS, ground for cancellation of credit given in advance of collection, 28. enforcing trust in debt of drawer as against other creditors of drawee bank, 231. P. PAROL EVIDENCE, explaining indorsement, 34, 35. of contents of placard posted in bank, 28i. INDEX. 359 PARTIES, authority of bank to sue on paper in its own name, 48-53. real party in Interest in suit on paper left in bank for collec- tion, 52, 53. maker discharged by payment cannot sue bank for misappropria- tion of proceeds, 200, note. to action against correspondent bank for proceeds, 209. to action against bank for not applying deposits to payment of depositor's paper, 75. PARTNERSHIP, banking partnership liable for wrongful delivery of bills of lad- ing by one partner, 70, note. lien of collecting bank on firm paper for balance due on firm ac- count, 39, note. survivor of banking firm has no authority to credit checks re- ceived after dissolution, 186. right to proceeds of paper belonging to firm or partner, 206. PART PAYMENT, collecting bank not authorized to receive, 79. ratification of acts of bank, 128. bank cannot apply deposits of obligor to part payment of paper, '74. PAYEE, collecting bank as agent of, 7, 8. correspondent has lien as against owner for debt of initial bank, which had been made the payee of the paper, 218. indorsing forged paper cannot recover from drawee, 252. indorsement by bank on forged check payable to cash, not equivalent to indorsement by payee, 262. indorsement of payee forged, liability of collecting bank, 254. indorsing forged or raised paper to paying bank must repay, 264. not disqualified by interest from testifying in suit by drawee against collecting bank for money paid on forged indorsement of payee's name, 269, note, ratification of forged indorsement, 255. PAYING TELLER, not authorized to receive deposit to take up paper held for col- lection, 75. 360 INDEX. PAYMENT, relation when paper is payable at bank, 9-11. collecting bank is agent to receive payment, 6, 7. whether bill was taken in payment of debt or for collection as question for jury, 15, note. what constitutes, in general, 182-191. where creditor is ignorant of debt, 267. to payee of order signed by owner, is payment to owner, 201, 202. effect of credit in advance of collection, 184. not effected by sending check to drawee, 134, note. receipt merely prima facie evidence of, 193. by draft not complete until draft is paid, 192. to correspondent as payment to initial bank, 191. to or through clearing house, 212. to ostensible agent of corporation, 202. time and manner of receiving, 78-80. extensions and renewals, 79. must be in money, 80. authority of bank to take checks, 81-84. on itself, 86. to collecting bank by its own certificates of deposit, 85. sufficiency of evidence as to payment in money rather than in certificates of deposit, 85, note. right of collecting bank to retain bills of lading until payment of drafts, 67-71. place of, negligence of holder in failing to properly inform col- lecting bank, 63. authority of bank to receive payment after dishonor, 54. &.pplication of deposits to payment of depositor's paper held for collection, 71-76. presumption that paper would have been paid but for fraud cf • bank in first securing its own claim against obligor, 88. draft not stating time of, is payable on demand, 104. not a waiver of negligence of bank, 129. msiker discharged by, cannot maintain action for misappropria- tion of proceeds, 200, note. enforcement of paper taken in payment, 122, 123. by maker to indorsers, no defense to action against bank for failure to protest, 116, 117. taking note or check does not make bank a trustee for amount of collection, 238. presentment for, 107-115. INDEX. 361 PAYMENT— Cont'd. not necessary where paper is payable at bank, 111, 112. premature, 109. waiver of negligence of bank, 127, 128. by collecting bank of paper on which name of maker or drawer was forged, 250. on which indorsement of payee was forged, 234. by mistake and recovery of payments, 192-197. recovery back of payments made on forged or altered p&,veT, 264. action by collecting bank against drawers to recover back, defense that bank sent paper directly to drawee, 134j note, mistaken payment by drawer does not relieve correspondent from liability to initial bank, 180. indorsar msy recover back, 127. payment by indorser in ignorance of legal discharge from liabilityy may be recovered back, 126, 127. promise to pay made by indorser in ignorance of legal dis- charge not binding, 126. voluntary payment cannot be recovered back, 197. application of payments, 265, note. PENNSYLVANIA, rule as to liability of initial bank for defaults of correspondents, 162. PETITION, summary application to establish trust in proceeds in hands of receiver, 233, note. PLACARD, parol evidence of contents of placard posted In bank, 283. PLACE, of performance of undertaking determines what law governs re- lation between bank and customer, 11-13. of payment, relation when paper is payable at bank, 9-11. PLEADING, in actions for negligence of bank, 278. allegation of bailment for collection not inconsistent with alle- gation that bank obtained paper through fraudulent conceal- ment of its insolvency, 227, 228. 362 INDEX. PLEADING— Cont'd. complaint held to negative plaintiff's right to sue on the paper In his own name, 49, note, answer, 280. variance, 284. PLEDGE, bank may pledge paper indorsed in blank, 33. of paper to bank, interest of pledgor is subject to attachment before collection, 39. lien of bank as pledgee of paper, 41. deposit for collection by pledgee, pledgor proper party to sue bank for negligence, 275, note. POSSESSION, collecting bank entitled to possession as against all but owner, 37, 38. collecting bank may sue for, 51, 52. of paper indorsed in blank is prima facie evidence of owner- ship, 33. of note indorsed in blank, holder may sue bank for negligence, 275. by bank of dishonored note, right of bank to sue thereon in it: own name, 50. POWER, of bank to make collections, 44-46. PREFERENCE, fraud of bank in obtaining preference for its own claim to prejudice of owner of paper, 86-90. lien of bank accepting draft of insolvent national bank dates from time of acceptance, 216. refual to pay check of customer does not create preference, 231 of claim for proceeds of collection, 224-246. see, also, "Tl-uBt." PRESENTMENT, for acceptance, duties and liabilities of collecting bank, 103-107. burden of proving, 104. not necessary in case of paper payable on demand, 104. excuses for failure to present, 105, 106. measure of damages for failure to present, 296. for payment, 107-115. INDEX. 363 PRESENTMENT— Cont'd. not necessary where paper is payable at bank, 111, 112. effect of custom, 114, 115. nominal damages for f&ilure to present, 289. PRESUMPTION, as to title to paper deposited for collection, 23-25. of knowledge of general and uniform customs of banks, 17. of custom to take checks in payment, 83. of negligence, in general, 281. from loss of the paper, 64, 66. from sending paper directly to drawee for collection, 133-140. that regularly commissioned notary is a proper person to select for making protest, 143. that indorsers will take advantage of their legal discharge, 121, 122. that demand note payable at bank was in the bank, 112. that deposit to take up accepted bill was .made by acceptor, 75. that paper would have been paid but for fraud of bank in first securing its own claim against obligor, 88. that cash on hand at time cf failure of collecting bank is pro- ceeds of collection, 245. PRINCIPAL AND AGENT, collecting bank as agent, 6-8. relation not provable by declarations of alleged agent, 147. agency of collecting bank when paper is payable there, 9-11. bank's agency undisclosed, liability for money received on forged paper, 269. pleading the relation, 278. termination of bank's authority to collect, 53-56. revocation of authority of collecting bank, 54, 55. agent for collection not real party in interest in suit on paper, 53. custom and usage as abrogating instructions to agent, 48, note, collecting or investing agents not chargeable in garnishment or trustee process, 38, note, agent liable for securing his own claim to prejudice of principal, 86-90. indorsement by collecting agent, warranty of genuineness of prior indorsements, 260, 261. agent cannot delegate powers, 174, 175. liability of correspondent bank to initial bank, 179. 364 INDEX. PRINCIPAL AND AGENT— Cont'd. rule that agent is liable for acts of subagents, 175. employment by bank of agents other than notaries and other banks, 146, 147. notary as agent of bank or owner, 141-146. care required in selection of agents to assist in collection, 132- 140. drawee or obligor not a suitable subagent or correspondent, 133-140. payment of corporate paper to ostensible agent of company, 202. recovery of money paid by mistake to agent who has not turned it over to principal, 195. bank liable for proceeds when collected by its agents, 201. PRIORITY, in distribution of assets of insolvent collecting bank, 224-246. PRIVITY, between owner and notary employed by collecting bank, 142-146. between payee and bank collecting paper on forged indorsement of his name, 255. PROCEEDS, how remitted, 191. estoppel of bank to deny receipt of, 122, 123. authorization to apply proceeds on debt to bank does not pass title, 20. depositor of paper bound by custom of mingling proceeds with funds of bank, 18, 19. of paper originally indorsed in blank to initial bank, 223. title as affected by rules and usages of clearing houses, 212. who entitled in general, 201-203. rights of creditors of owner of paper, 204. of paper belonging to firm or partner, 206. of judgment on joint claims of bank and customer, 207. liability of correspondent to owner, 207. to initial bank, 209. promise to account for is not negotiable, 201, note, order to "deliver" equivalent to order to "pay," 201. interest on, 294, 295. action for, held to be action for conversion within California statute of limitations, 278, note, lien of correspondent for debt of initial bank, 213. INDEX. 365 PROCEEDS— Cont'd. enforcing preference or establishing trust, 224-246. conversion as establlslilng trust, 227-229. tracing and following into estate of insolvent collecting b&mk, 232-246. of paper indorsed for collection form a trust, 222, 223. PROFITS, as sufficient consideration for undertaking to collect, 14. PROMISSORY NOTE, see "Notes." PROPERTY, right to follow trust funds is a right of property, 228. PROTEST, duties and liabilities of collecting bank, 115-117. premature, before expiration of days of grace, 108-110. costs of, when failure to deposit in advance will relieve bank from liability for negligence, 63, 64. damages on protest not recoverable by bank as compensation for collecting, 15. employment of notary public, bank must use due care in select- ing notary, 132, 133. presumption that regularly "commissioned notary is a proper person to make, 143. return of dishonored paper, 123-125. bank liable for failure to protest, without prior suit ag&inst dis- charged indorsers, 121, 122. PUBLIC POLICY, customs of banks contrary to, not binding, 18. validity of stipulation by bank against liability for its own neg- ligence, 60. custom of sending paper directly to drawee for collection is against public policy, 138, 139. PURCHASER, bank not a purchaser of paper deposited for collection, 19-21. collecting bank not aj bona fide purchaser, 30. bona fide, rights to proceeds of paper, 203. 366 INDEX. Q- . QUESTION OP FACT, whether title passes to bank in particular case, 20. negligence of collecting bank, 95-97. in not seasonably returning dishonored paper, 125. what Is reasonable time for presentment of check, 113. right to recover face value of paper, 290. R. RATIFICATION, of negligence of collecting bank, 97, 98, 126-129. of taking Confederate money in payment, 81, note. of remittance by draft, negatives right to preference or trust on failure of remitting bank, 230. of collection of forged paper, 271. of forged indorsement, 255. by payee of payment by maker of check with indorsement of payee forged, 257, 258. REAL PARTY IN INTEREST, right of collecting bank to sue on paper in its own name, 52, 53. in suit against correspondent for failure to turn over proceeds, 209. REASONABLE CARE. degree of care required of collecting bank, 59, 102. in selection cf agents and correspondents, 132-140. of notary relieves bank in some jurisdictions, 142, 143. compliance with custom as evidence of, 18. REBUTTAL, of presumption of negligence from loss of paper, 66. REJCEIPT, for paper, evidence of agreement to collect, 15. merely prima facie evidence of payment, 193. RECEIVER, enforcing trust for proceeds collected by, 241. reclaiming from receiver uncollected checks, taken when bank was known to be insolvent, 242, note. INDEX. 367 RELATION, between collecting bank and customer, 2. when collecting bank becomes debtor for amount of paper, 182. when paper is payable at bank, 9-11. pleading the relation between collecting bank and customer, 278. RELEASE, see "Discharge." REMEDY AT LAW, for conversion, excludes remedy in equity on theory of trust, 229, note. REMITTANCE, by bank, how made, 191. by draft or check, when trust arises on failure of drawer or drawee bank, 229. RENEWALS, authority of bank, 79. acceptance of, as waiver of negligence of bank, 128, 129. RENUNCIATION, by bank .of authority to collect, 55, 56. REPUTATION, as evidence of insolvency, 284. RESCISSION, of credit given in advance of collection, 25-29. for forged or altered paper, 262. of contract to pay excess over true amount of raised draft, 268. draft of collecting bank given in payment, 196, 197. of sale, effect on liability of bank collecting draft, for default of correspondent, 172. RES JUDICATA, judgment on general claim for proceeds bars enforcement of trust or preference, 245, 246. RESTRICTIVE INDORSEMENT, see "Indorsement." RETURN, of dishonored paper, 123-125. 368 INDEX. RETURN— Cont'd. renunciation of authority to collect, 56. waiver of negligence, 128. of paper, not a condition precedent to suit by initial bank against correspondent, 180. wrongful return of draft sent in payment, 122, 123. REVOCATION, of authority of collecting bank, 54, 35. REWARD, delivery for collection a biiilment for reward, 4, 5, 13-15. consideration for undertaking to collect, 13-15. RULES, of bank, effect on passage of title to paper, 27. of bark that it will act only as collecting medium, do not pre- vent discounting, 36. requiring deposit of protest fees in advance, noncompliance as relieving bank, 63, 64. of clearing houses, 17, note, 212. SALE, bank not a purchaser of paper deposited for collection, 19-21. collecting bank not a bona fide purchaser, 30. bank has no implied authority to sell paper delivered for collec- tion, 47. bank in possession of note indorsed in blank may sell it, 33. surrender by collecting bank of bills of lading, 67-71. SATISFACTION, see "Payment." SCOPE, of authority of collecting bank, in general, 46, 47. SECOND INDORSBR, cannot sue bank for failure to notify prior indorser, 121. SECURITY, taken by collecting bank on property of obligor to prejudice of rights of owner of paper, 86-90. taking security against forgery ratifies it, 272, note. INDEX. 369 SET-OFF, of dept to bank against paper deposited by debtor for collection, 39-42. by correspondent of debt due from initial bank, 213. SETTLEMENT, between banks by mutual credits and debits, 187, 188. of claim against forger, ratification of collection on forged in- dorsement, 272, note. SIGHT DRAFTS, presentment for acceptance, 104, 105. indorsee entitled to notice of nonaoceptance tliough drawer in- solvent, 118. bank must retain bills of lading until payment of, 69. SIGNATURE, of drawer, drawee charged with knowledge of handwriting, 250. SILENCE, not a ratifleation of forgery, 272, note. SOLVENCY, of drawers or indorsers, presumptions and burden of proof, 282. pleading, 280. SOUTH DAKOTA, rule as to liability of initial bank for defaults of correspondents, 158. SPECIAL DEPOSIT, for collection, title does not pass, 21. bank not liable for failing to protest a note left in private envelope of depositor, 117. SPECIAL INSTRUCTIONS, see "Instructions." STATUTES, admissibility to show bar of claim on note by limitations, 284. STOPPAGE IN TRANSIT, application of doctrine denied where collecting bank wrongfully returned draft given in payment, 123. 370 INDEX. SUCCESSIVE INDORSEMENTS, see "Indorsement." SUCCESSIVE OBLIGORS, time for notifying of dishonor, 120, note. SUMMARY APPLICATION, to enforce trust in proceeds in hands of receiver of bank, 233, note. SUNDAY, liability for mistake in time of protesting note payable on, 109, 110. time of presentment of paper payable on, effect of custom, 114. SURPLUSAGE, allegations of matters implied by law, 284. T. TELEPHONE, presentment for acceptance by, burden of proving, 104. TENDER, of paper not a condition precedent to action against bank re- ceiving payment by mistake, 268, 269. to action against bank for negligence, 276. TENNESSEE, rule as to liability of Initial bank for defaults of correspondents, 171. TEXAS, rule as to liability of initial bank for defaults of correspondents, 159, TIME, of maturity, negligence of collecting bank in determining, 108- 110. for giving notice of dishonor, 117-121. of receiving payment, 78-80. for notifying successive obligors, 120, note. TITLE, as general rule remains in depositor of paper, 19-21. INDEX. 371 TITLE— Cont'd. does not pass unless bank has become absolutely liable for amount of the paper, 20. If bank was Insolvent when paper was received, 21. passes to bank if paper received and treated as cash, 21-23. effect of entry of credit and drafts against credit, 22, 23. payment of interest as factor in determining title, 22, 23. effect of credit in advance of collection, 25-29. of bank divested on dishonor of paper for which advance credit was given, 27. effect of form of indorsement, 29-35. Indorsement "for collection" prevents passage of title, 29. passes under blank indorsement, 32-34. passes where bank discounts paper, 35, 36. option of bank to discount or collect, 36. revesting in depositor after passage to bank, 37. after title passes to bank, owner cannot revoke authority of bank,, 55. collecting bank has title only so far as necessary to effect col- lection, 31. as between initial and correspondent banks in general, 210. bank's agency undisclosed, liability for money received on forged or altered paper, 269. warranty by general indorsement, 93, note. parol evidence varying or explaining Indorsement, 34, 35. trust not enforceable for proceeds of paper if title had pass«d to bank, 243. presumptions, 23-25. TORTS, wrongful sale by bank, bona fide holder entitled to proceeds of paper, 203. wrongful garnishment, who may sue, 203. bank not liable- for malicious publication of protest by notary, 144. TRANSFER, for collection without indorsement does not pass title, 20. of paper without indorsement, transferee may sue on the paper in his own name, 50. bank has no implied authority to sell paper delivered for collec- tion, 47, 372 INDEX. TRANSMISSION, of instructions and information to correspondent bank, 94. rule that initial bank need only transmit to suitable correspond- ent, 160-174. TRIAL, objection that correspondent banks are not jointly liable to ini- tial bank may be taken at the trial, 152, note. TROVER, ■see "Conversion." TRUST, relation between collecting bank and customer is not a trust, 8, 9. proceeds as a trust fund, 224-246. in proceeds of paper originally indorsed for collection, 222, 223. not created by refusal to pay customer's check, 231. where remittance was made by check or draft, and drawer or drawee bank failed, 229. in proceeds disposed of before insolvency, 239. charging amount of paper to account of customer before insol- vency, 239. does not arise where proceeds never came into possession of bank, 237-239. in proceeds used to settle balance at clearing house, 241. in proceeds collected by assignee or receiver of bank, 241. limited to assets realized at time of failure of bank, 245. what portion of assets is impressed with trust for proceeds of collection, 245. right to follow trust funds is a right of property, 228. right exists as against any fiduciary, whether agent, bailee or trustee, 225, 226. tracing and following proceeds into insolvent estate of collecting bank, 232-246. when trustee chargeable with interest, 295. burden of procf to establish, 226, 227. establishment on summary application, rather than by suit in equity, 233, note, waiver of, 245. TRUST COMPANIES, collecting bank liable for taking uncertified check of, in lieu of payment, 84. INDEX. 373 TRUSTEE PROCESS, paper in bank for collection not subject to, 38, 39. right to proceeds of collection, 204, 205. u. UNDERTAKING, Implied from delivery and receipt of paper for collection, fi UNDISCLOSED AGENCY. of bank renders it lia;ble for money received on forged paper, 269. custom not to discloso agency is not notice to drawee paying bank on forged indorsement of payee's name, 270. UNLIQUIDATED CLAIMS, do not give bank lien or right of set-ofC, 40. USAGES, see "Custom." V. VALUE, consideration for undertaking to collect, 13-15. VARIANCE, pleading and proof, 284. VERDICT, in action for negligence, 286 VOLUNTARY PAYMENT, cannot be recovered back, 197. W. WAIVER, by bank of rule that it will act only as collecting medium, 36. of irregularity of taking draft of other bank in payment, 81, 82. bank does net waive lien on paper deposited for collection by accepting general assignment of depositor for bemeflt of credit- ors, 42. of negligence of collecting bank, 97, 98, 126-129. as to forged paper, 271. of preference or trust, 245. 374 INDEX. WARRANTY, by general indorsement, 93, note. certification not a warranty of genuineness of body of Instru- ment, 271. WISCONSIN, rule as to liability of initial bank for defaults of correspondents, 167. WITHDRAWAL, from mails, of draft or check given by bank in payment of col- lection, 122, 123, 196. of paper from bank not a waiver of prior negligence, 128. of deposit made to take up paper, 190. WITNESS, payee not disqualiiied by interest from testifying in suit by drawee against collecting bank for money paid on forged in- dorsememt of payee's name, 269, note. WRONGFUL GARNISHMENT, see "Garnishment."