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(264 U. S. 160, 68 L. ed. —, Adv. Op8. p. 288, 44 Sup. Ct. Rep. 296.) ment of the draft from the cashier responsible to him for their deof the Lumber Bridge bank. The faults. This court, in Exchange cashier of that bank, after stating Nat. Bank v. Third Nat. Bank, 112 that it did not have sufficient funds U. S. 276, 28 L. ed. 722, 5 Sup. Ct. to pay the dishonored draft, prom- Rep. 141, after reviewing the two ised that steps would be taken to lines of decisions, approved the meet it.
“New York rule.” But the rule On December 21st the representa- may, of course, be varied by contive of the Richmond bank was in- tract, express or implied. Id. 289. formed that the dishonored draft Here the relations of the payee to could not be paid, and on the same the initial bank of deposit are conday the Richmond bank notified the trolled by the Flori
Banksliability Atlanta bank of the situation, and
da statute with re- of collecting this notice was promptly trans- spect to which it bank to de
positor. mitted to the plaintiffs. The must be presumed amount of the check was thereupon they dealt with each other. This charged by the Richmond bank to statute had the effect of importing the Atlanta bank, which, in turn, the "Massachusetts rule" into the charged the amount to its immedi- contract, with the result that the inate correspondent, and so on until itial bank had implied authority to it was finally charged back to the intrust the collection of the check plaintiffs.
to a subagent, and that subagent, in In view of the conclusion which turn, to another; and the risk of we have reached, we find it neces- any default or neglect on their part sary to consider but two questions: rested upon the owners. 112 U. S.
1. Can the present action be 281. It follows that the action was maintained by plaintiffs, Malloy properly brought against the RichBrothers, against the Richmond mond bank. bank? and
Second. For the purposes of the 2. If so, did the failure of the case, we assume the correctness of Richmond bank to require payment
the decision below, holding that the of the Malloy check in money, and Richmond bank was not negligent its acceptance of what turned out to in sending the check directly to the be a worthless draft in lieu thereof, bank on which it was drawn, and create a liability against it and in consider only whether the acceptfavor of Malloy Brothers for the ance of an exchange draft, found to amount of the loss?
be worthless, instead of money, First. The state decisions in re- creates an enforceable liability. spect of the liability of a corre
It is settled law that a collecting spondent bank to the owner of a
agent is without authority to accept check forwarded for collection by for the debt of his the initial bank of deposit are in principal anything daty of collectconflict beyond the possibility of rec
but “that which the onciliation. A number of states, , law declares to be a legal tender, or following the “New York rule,” so which is by common consent concalled, have held that there is no sidered and treated as money and such direct liability; but that the in- passes as such at par.” Ward v. itial bank alone is responsible to the Smith, 7 Wall. 447, 452, 19 L. ed. owner. On the other hand, an 207, 210. The rule applies to a bank equal, if not a greater, number of receiving commercial paper for colstates following the “Massachusetts lection, and if such bank accepts the rule," have held exactly the con- check of the party bound to make trary; viz., that the initial bank, by payment, and sur
-llability for the mere fact of deposit for collec- renders the paper, accepting worthtion, is authorized to employ sub- it is responsible to agents, who thereupon become the the owner for any resulting loss. agents of the owner, and directly Fifth Nat. Bank v. Ashworth, 123 Pa. 212, 218, 2 L.R.A. 491, 16 Atl. Richmond bank as payment of the 596; Hazlett v. Commercial Nat. Malloy check had the effect of reBank, 132 Pa. 118, 125, 19 Atl. 55; leasing the drawer,
Checks-release National Bank v. American Exch. and therefore ma- of liability of
drawer. Bank, 151 Mo. 320, 329, 74 Am. St. terially altering the Rep. 527, 52 S. W. 265; Essex Coun- relations of the parties. Technicalty Nat. Bank v. Bank of Montreal, 7 ly, there resulted a transfer of the Biss. 193, Fed. Cas. No. 4,532; Noble drawer's funds and his right of acv. Doughten, 72 Kan. 336, 351-353, tion against the drawee bank; and 3 L.R.A.(N.S.) 1167, 83 Pac. 1048; previous rights and obligations beAnderson v. Gill, 79 Md. 312, 317, tween the owners of the check and 25 L.R.A. 200, 47 Am. St. Rep. 402, drawer were superseded. It fol29 Atl. 527; Bank of Antigo V. lows-this result having been Union Trust Co. 149 Ill. 343, 351. brought about by the unauthorized 23 L.R.A. 611, 36 N. E. 1029. It act of the Richmond bank, standing is unnecessary to cite other deci- in that transaction in the relation sions, since they are all practically of agent to the owners of the check uniform. Anderson v. Gill, 79 Md. —that such owners are entitled to 317, 25 L.R.A. 200, 47 Am. St. Rep. recover from the Richmond bank 402, 29 Atl. 527, presented a situa- for the loss which they sustained, tion practically the same as that we unless the case falls within some are here dealing with, and the su- exception to the general rule. preme court of Maryland, in dispos- And as to this, the Richmond ing of it, said:
bank says: (1) That its immediate “Now, a check on a bank or bank- correspondent, from whom it reer is payable in money, and in noth- ceived the check, was bound by a ing else. Morse, Banks & Bkg. 2d regulation of the Federal Reserve ed. p. 268. The drawer having Board, which authorized the methfunds to his credit with the drawee od of collection pursued, and that, has a right to assume that the payee since that correspondent was the will, upon presentation, exact in agent of the owners of the check in payment precisely what the check the transaction, they are likewise was given for, and that he will not bound; (2) that the method was accept, in lieu thereof, something justified by a custom, binding upon for which it had not been drawn. Malloy Brothers. We consider It is certainly not within his contem- these contentions in their order. plation that the payee should, upon 1. The regulation relied on, so presentation, instead of requiring far as pertinent, is to the effect that the cash to be paid, accept at the a Federal reserve bank will act as drawer's risk a check of the drawee agent only in handling items for upon some other bank or banker. member and nonmember banks, The holder had a right to make Im- who are required to authorize “its mediate demand for payment upon Federal reserve bank to send checks receipt of Anderson's check, though for collection to bank on which she was not bound to do so. When checks were drawn, and, except for her agent, the Old Town Bank,—the negligence, Federal reserve banks collecting bank being the agent of will assume no liability." Regulathe holder (Dodge v. Freedman's tion J (8) of 1920. This regulation, Say. & T. Co. 93 U. S. 379, 23 L. ed. while it contemplates the sending of 920),-did make demand, it was checks for collection to the drawee only authorized to receive money banks, does not ex(Ward v. Smith, 7 Wall. 451, 19 L. pressly permit the regulation re
Bank effect of ed. 209); and the acceptance by the acceptance of pay
liability. collecting agent of anything else ment other than in rendered it as liable to the holder as money. It is insisted, however, that though it had collected the cash." the authority to send checks to the
Acceptance of the draft by the drawee bank carries with it, by (264 U. 8. 160, 68 L. ed. -, Adv. Op8. p. 288, 44 Sup. Ct. Rep. 296.) necessary implication, authority to will appear presently, frequently is accept a draft in payment from the sent. The first form of remittance, drawee. We assume, for the pur- to be sure, is more convenient; but poses of the argument, that the ob- it is not of such necessity as to exligation which the law imposes to clude the second on the score of imcollect only in money may be varied practicability. There is nothing to by a regulation, clearly and posi- prevent the sending bank from retively so providing, although, in quiring the drawee to remit curterms, it relates only to the banks rency as a condition upon which the inter se, upon the ground that the check may be satisfied and charged owner of the check is bound by the to the account of the drawer. We knowledge and consent of his sub- must not lose sight of the fact that agent. But to justify an extension we are here dealing with two disby implication of the terms of the tinct rules of law, both of which are regulation, it must be made to ap- sought to be avoided: (a) that pear, at least, that the addition which forbids a bank having paper sought to be annexed is a necessary for collection to use the drawee means to carry into effect the au- bank as a collecting agent; and (b) thority expressly given by the regu- that which forbids a collecting lation. See First Nat. Bank v. Mis- agent accepting anything but money souri, 263 U. S. 640, 68 L. ed. - in payment. The first rule is probAdv. Ops. p. 235, 44 Sup. Ct. Rep. ably based upon the theory that the 213, decided January 28, 1924. It drawee is not a suitable agent for follows from this limitation upon the enforcement of his own obligathe extent and purpose of implied tion, and that commercial paper powers, that a distinct and inde- calling upon him to pay should not pendent power cannot be brought be surrendered to and satisfied by into existence by implication from him, with the consequent release of the grant of another distinct power. the drawer, except upon previous or In other words, authority to do a contemporaneous payment. The specific thing carries with it, by im- second rule proceeds upon the fact plication, the power to do whatever that the obligation of the drawee is is necessary to effectuate the thing to pay in money, and nothing else. authorized, not to do another and Plainly, the two rules are of such separate thing, since that would be, nature that one may be abrogated not to carry the authority granted without the other; and it is obvious, into effect, but to add an authority since the law imposes upon a colbeyond the terms of the grant. The lecting agent the duty to collect in authority expressed by the regula- money, that none of the various subtion is “to send checks for collection agents receiving the paper to be colto banks on which checks were lected upon the basis of that duty drawn;" the authority now sought can waive the requirement of the to be annexed by implication is “to law in favor of the agent to whom accept exchange drafts in pay- it is transmitted. Indeed, in transment," instead of money, as re- mitting the check here in question to quired by law. That neither is a the Richmond bank, the intermedinecessary means of carrying the ate banks, in effect, served only as
other into effect is instruments for effectuating the -effect of right
clear. Nor are they transmission. In essence and in
necessary to each substance the check was delivered other in the sense that they are by its owners to the Richmond corollary or dependent. Certainly bank; it is to that bank, as we have a check may be sent for collection to said, they must look for redress; the drawee bank without entailing and the responsibility of that bank the necessity of remitting the is the same as though the check had amount in the form of exchange. been delivered directly to it for colCurrency itself may be sent; and, as lection by the owners.
to send checks to drawee.
In this connection, certain state rency, being wholly a matter of its statutes are also referred to; but, if discretion or even of its caprice, as applicable, we find nothing in them to which the owners are not conthat justifies a different conclusion sulted, would be at its peril rather from that reached in respect of the than at the risk of the owners of the regulation just considered. Their check. provisions are, in substance, the But the proof shows that the alsame.
leged custom was not known to 2. Finally, it is urged that the ac- plaintiffs; and they could not be ceptance of the drawee's own draft, held to it without
Custom-as to instead of money, was justified by such knowledge, be- bank collections custom. The testimony relied upon
-how far bound.
cause, all other reato establish the custom follows: sons aside, by its uncertainty and
“The business of check collecting lack of uniformity, it furnishes no is handled by the Federal Reserve definite standard by which the Bank in a way very similar to that terms of the implied consent sought in which it is handled by collect- to be established thereby can be deing banks throughout the country. termined. It furnishes no rule by When one bank receives checks on which it can be ascertained when another in a distant city, it usually an exchange draft shall be remitted sends them to the bank on which and when currency shall be rethey are drawn, or to some other quired, or who is to exercise the bank in that city, and receives set- right of election. “A custom to pay tlement by means of an exchange 2 pence in lieu of tithes is good; but draft drawn by the bank to which to pay sometimes 2 pence, and somethe checks are sent upon some one times 3 pence, as the occupier of the of its correspondents. When checks land pleases, is bad for uncertainare sent with the expectation that ty." 1 Bl. Com. 78. An alleged the bank receiving them will remit custom to remit either in exchange at once, we call it sending for col- or in currency, at somebody's option, lection and return. When this is means nothing more than a pracdone, the bank upon which the tice sometimes to remit by exchange checks are drawn is expected to and sometimes not, and therefore cancel the checks and charge them lacks the essential qualities of certo the accounts of the drawers, and tainty and uniformity to make it a to remit by means of its exchange custom of accepting payment by exdraft, or by a shipment of currency. change draft, binding upon the An exchange draft is used more owners of the check. Oelricks v. frequently than a shipment of cur- Ford, 23 How. 49, 62, 16 L. ed. 534, rency.”
538; Kalamazoo Corset Co. v. SiIt thus appears that the custom, mon, 129 Fed. 144, 146; Chicago, if otherwise established, does not M. & St. P. R. Co. v. Lindeman, 75 fix a definite and uniform method of C. C. A. 18, 143 Fed. 946, 949, 20 remittance. When checks are sent Am. Neg. Rep. 243; Foley v. Mason, for collection and return, the bank 6 Md. 37, 50; Wilson v. Willes, 7 is expected to cancel the checks and East, 121, 127, 103 Eng. Reprint, charge them to the account of the 46, 3 Smith, 167, 8 Eng. Rul. Cas. drawers, and remit "by means of 311, 8 Revised Rep. 604. A custom its exchange draft, or by a shipment to do a thing in either one or the of currency," the former being used other of two modes, as the person more frequently than the latter. relying upon it may Whether the choice of methods is at choose, can furnish method of the election of the drawee bank or no basis for an im- performance
effect. the collecting bank does not appear. plication that the If it be the latter, it would seem to person sought to be bound by it had result that the election to have re- in mind one mode rather than the mittance by draft instead of cur- other.
(264 U. S. 160, 68 L. ed. Adv. Ops. p. 288, 44 sup. Ct. Rep. 296.) It is said, however, that there is now necessary to consider the effect a custom among banks to settle of a custom which contravenes a among themselves by means of
settled rule of law, or the limits drafts, so well established and no
within which such a custom can be torious that judicial notice of it upheld. See Barnard v. Kellogg, 10 may be taken. But the usage here Wall. 383, 390–394, 19 L. ed. 987, invoked is not that, but is one of
989–991. Decisions upon that quesspecial application to a case where
tion are in great confusion. But
whatever may be the doctrine in the collection of a check is intrusted
other respects, certainly a custom to the very bank upon which the
relied upon to take check is drawn, and where payment the place of a settled rule of law
-to supplant is accepted in a medium which the principle of
law, contract, read in the light of the
and therefore to have the force of law, forbids. The special situation
The special situation law, ought to be as definite and spewith which we are dealing is con- cific in negativing the principle as trolled by a definite rule of law the law which it assumes to supwhich it is sought to upset by a cus- plant is in affirming it. tom to the contrary effect. It is not Judgment affirmed.
Federal reserve banks and bank collections.
The cases on this question are collected and discussed in annotation in 30 A.L.R. 635.
An important contribution to the law on this subject is made by the decision of the Federal Supreme Court in the reported case (FEDERAL RESERVE BANK V. MALLOY, ante, 1261), where a Federal reserve bank was held not justified in accepting a draft instead of cash in the collection of a check, and was held liable to the payee of the check where the draft was dishonored. The court held that no custom was shown justifying the acceptance of the drawee's own draft in
stead of money, and that such method of collection was not warranted by a regulation of the Federal reserve banks that they would assume no liability in collections except for negligence, and that Federal reserve banks were authorized to send checks for collection directly to the drawee. For holdings of the lower Federal courts in this case, see the annotation in 30 A.L.R., on pp. 650, 651.
No other case appears to have passed on the present question since the preparation of the earlier annotation on this subject. R. E. H.
STANDARD PRINTING & PUBLISHING COMPANY
Maryland Court of Appeals - June 25, 1923.
(143 Md. 303, 122 Atl. 195.)
Set-off — of insurance loss on premium note.
1. A claimant under a strike insurance policy cannot set off his claim upon an assessment against his premium note, where the claims against the insurer exceed the aggregate of the assessments, while other policy