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liability in collections except for negligence, does not authorize them to accept drafts in payment of checks sent them for collection.
[See note on this question beginning on page 1269.] - liability of collecting bank to de- Banks effect of right to send checks positor.
to drawee. 2. Where, by statute, a bank in 6. The regulation of the Federal rewhich a check is deposited for col- serve banks, permitting them to send lection becomes liable only after pay- checks for collection directly to the ment is received, banks to which the drawee, does not include authority to check is sent in course of collection accept drafts in payment. become agents of the depositor,
Custom as to bank collections against which he may maintain suit
how far bound. in case of their negligence.
7. One depositing a check for colduty of collecting agent.
lection cannot, without knowledge of 3. A collecting agent is without au- a custom of collecting banks to acthority to accept for the debt of his
cept drafts in payment, be charged principal anything but that which the
therewith, where the custom, law declares to be legal tender, or proved, is that remittance is either by which is, by common consent, con- draft or in currency. sidered and treated as money, and [See 27 R. C. L. 178.] passes as such at par. [See 3 R. C. L. 616; 1 R. C. L. Supp.
- alternative method of performance
effect. 864; 4 R. C. L. Supp. 208.]
8. A custom to do a thing in either liability for accepting worthless draft.
one or the other of two methods, as
the person relying on it may choose, 4. A bank to which a check is sent for
can furnish no basis for an implicacollection becomes personally
tion that the person sought to be liable in case it accepts as payment a
bound by it had in mind one mode draft which proves to be worthless.
rather than the other, [See 3 R. C. L. 617; 1 R. C. L. Supp. 864; 4 R. C. L. Supp. 208. See also to supplant rule of law definitenote in 19 A.L.R. 589.] Checks release of liability of
9. A custom relied upon to take the drawer.
place of a settled principle of law, 5. The acceptance by a bank having
and therefore to have the force of law, a check for collection, of a draft in must be as definite and specific in payment, releases the liability of the negativing the principle as the law drawer.
which it assumes to supplant is in [See 3 R. C. L. 641; 1 R. C. L. Supp. affirming it. 870.]
[See 27 R. C. L. 155.]
ERROR to the United States Circuit Court of Appeals, Fourth Circuit, to review a judgment affirming a judgment of the District Court for the Eastern District of North Carolina in favor of plaintiffs in an action brought to recover the amount of a check alleged to have been lost through defendant's negligence. Affirmed.
The facts are stated in the opinion of the court.
Mr. M. G. Wallace, for plaintiff in 141; American Bank & T. Co. v. Federror:
eral Reserve Bank, 256 U. S. 350, 65 There was no privity of contract be- L. ed. 983, 25 A.L.R. 971, 41 Sup. Ct. tween the parties.
Rep. 499; Cohen v. Tradesmen's Nat. Taylor & B. Co. v. National Bank, Bank, 262 Pa. 76, 4 A.L.R. 518, 105 Atl. 262 Fed. 168; Balcomb v. Old Nat. 43; Montgomery County Bank v. AlBank, 120 C. C. A. 27, 201 Fed. 679; bany City Bank, 7 N. Y. 459. First Nat. Bank v. Federal Reserve There is an irreconcilable conflict Bank, 283 Fed. 700; Hoover v. Wise, in the decisions of the various state 91 U. S. 308, 23 L. ed. 392; Exchange courts upon the question of the nature Nat. Bank v. Third Nat. Bank, 112 U. of the responsibility which should be S. 276, 28 L. ed. 722, 5 Sup. Ct. Rep. inferred or implied from the mere act (264 U, S. 160, 68 L. ed. -, Adv. Op8. p. 288, 44 Sup. Ct. Rep. 296.) of accepting a check for collection Bank, 52 L.R.A.(N.S.) 634, note; Wilwhen there is no express contract set- son v. Smith, 3 How. 763, 11 L. ed. ting forth the liability of the collect- 820; Miller v. Farmers' & M. Bank, ing bank.
30 Md. 392; Farmers' Bank v. Owen, Exchange Nat. Bank v. Third Nat. 5 Cranch, C. C. 504, Fed. Cas. No. Bank, 112 U. S. 276, 28 L. ed. 722, 5 4,662; Bank of Lindsborg v. Ober, 31 Sup. Ot. Rep. 141; Bank of Washing- Kan. 599, 3 Pac. 324; City Nat. Bank ton v. Triplett, 1 Pet. 25, 7 L. ed. 37; v. Cooper, 91 S. C. 91, 74 S. E. 366; 3 R. C. L. 623, $8 251, 252.
Bank of Washington v. Triplett, 1 Pet. In those jurisdictions in which the 25, 7 L. ed. 37; Elliott, Contr. 88 2831, courts adhere to the so-called Massa- 2832; Mechem, Agency, $ 1; State v. chusetts rule, there is some diversity Hubbard, 58 Kan. 797, 39 L.R.A. 860, of opinion as to whether or not the 51 Pac. 290; Sternaman v. Metrodrawee is a proper subagent. The politan L. Ins. Co. 170 N. Y. 13, 57 majority of courts hold that it is never L.R.A. 319, 88 Am. St. Rep. 625, 62 proper to select the drawee as a sub- N. E. 763; Planters' & F. Nat. Bank agent, for the drawee always has an v. First Nat. Bank, 75 N. C. 534; Bank interest adverse to the holder of the of Rocky Mount v. Floyd, 142 N. C. check.
187, 55 S. E. 95. Bank of Rocky Mount v. Floyd, 142 The Federal Reserve Bank of RichN. C. 187, 55 S. E. 95; 3 R. C. L. 627. mond was negligent in sending the
Some courts, however, recognize check direct to the Bank of Lumber that under modern conditions the risks Bridge, notwithstanding the regulaincident to the method of collecting tions of the Federal Reserve Board. a check by sending it to the drawee Brady, Bank Checks, § 229; People for remittance were no greater than v. St. Nicholas Bank, 77 Hun, 159, 28 those incident to the employment of N. Y. Supp. 407; National Union Bank some independent agent in the same v. Earle, 93 Fed. 330; Merchants' Nat. place.
Bank v. National Bank, 139 Mass. 513, Hilsinger v. Trickett, 86 Ohio St. 2 N. E. 89; Overman v. Hoboken City 286, 99 N. E. 305, Ann. Cas. 1913D, Bank, 30 N. J. L. 61; Louisiana Ice 421; Kershaw v. Ladd, 34 Or. 375, 44 Co. v. State Nat. Bank, McGloin (La.) L.R.A. 236, 56 Pac. 402; Wilson v. 181; Dorchester V. Merchants Nat. Carlinville Nat. Bank, 187 Ill. 222, 52 Bank, 106 Tex. 201, 50 L.R.A.(N.S.) L.R.A. 632, 58 N. E. 250.
542, 163 S. W. 5, 7 N. C. C. A. 388; Authority to send checks directly Winchester Mill. Co. v. Bank of Winto the drawee implies authority to chester, 120 Tenn. 225, 18 L.R.A.(N.S.) accept exchange drafts from drawee. 441, 111 S. W. 248; 3 R. C. L. “Banks,'
First Nat. Bank v. Davis, 114 N. C. $S255-258, pp. 627-630; Anderson v. 343, 41 Am. St. Rep. 795, 19 S. E. 280; Rodgers, 27 L.R.A. 249, and note, 53 First Nat. Bank v. Wilmington & W. Kan. 542, 36 Pac. 1067. R. Co. 23 C. C. A. 200, 42 U. S. App. Plaintiff in error had no right to 232, 77 Fed. 401; Farmers' Bank & T. accept the exchange draft, as collectCo. v. Newland, 97 Ky: 464, 31 S. W. ing agent for defendants in error. 38; American Bank & T. Co. v. Federal Ward v. Smith, 7 Wall. 447, 19 L. Reserve Bank, 262 U. S. 643, 67 L. ed. ed. 207; Brown v. People's Bank, 52 1153, 43 Sup. Ct. Rep. 649; Brookings L.R.A.(N.S.) 652, note; Elliott, Contr. State Bank v. Federal Reserve Bank, § 1767; 3 R. C. L. "Banks," § 245, p. 277 Fed. 430, 281 Fed. 222.
616; Pinkney v. Kanawha Valley Bank, The acceptance of the exchange 68 W. Va. 254, 32 L.R.A.(N.S.) 987, draft was not a direct cause of loss. 69 S. E. 1012, Ann. Cas. 1912B, 115;
American Nat. Bank v. Miller, 229 Bank of Rocky Mount v. Floyd, supra; U. S. 517, 57 L. ed. 1310, 33 Sup. Ct. Bank of Antigo v. Union Trust Co. 149 Rep. 883; Bank of Rocky Mount v. Ill. 343, 23 L.R.A. 611, 36 N. E. 1029; Floyd, supra.
Winchester Mill. Co. v. Bank of WinMr. Robert H. Dye, for defendants chester, 120 Tenn. 225, 18 L.R.A.(N.S.) in error:
441, 111 S. W. 248; Kirkham v. Bank The Federal Reserve Bank of Rich- of America, 165 N. Y. 132, 80 Am. St. mond was the agent of Malloy Rep. 714, 58 N. E. 753; 6 R. C. L. 164; Brothers.
Rogers v. Tiedeman, 9 Ga. App. 811, Exchange Nat. Bank v. Third Nat. 72 S. E. 285; Goldsborough v. Turner, Bank, 112 U. S. 276, 28 L. ed. 722, 5 67 N. C. 410; Moye v. Cogdell, 69 N. Sup. Ct. Rep. 141; Brown v. People's C. 95; Farmers & M. Bank v. Federal Reserve Bank, 262 U. S. 649, 67 L. ed. check, draft, note, or other nego1157, 30 A.L.R. 635, 43 Sup. Ct. Rep. tiable instrument, and forwards the 651; Baldwin State Bank v. National
same for collection, as herein proBank, 144 Ga. 181, 86 S. E. 538; Miller
vided, it shall only be liable after v. Norton, 114 Va. 609, 77 S. E. 452.
actual final payment is received by Mr. Justice Sutherland delivered it, except in case of want of due the opinion of the court:
diligence on its part, as aforesaid.” Malloy Brothers brought this ac- The Perry Banking Company intion against the Federal Reserve dorsed and transmitted the check Bank of Richmond in a state court, to a bank at Jacksonville, Florida, to recover $9,000, alleged to be the which, in turn, indorsed and transamount of a check drawn to their mitted it, on account of the Atlanta order upon
the Bank of Lumber Federal Reserve Bank, to a bank at Bridge, North Carolina. The case Atlanta, Georgia; and by the latter was removed to the Federal district bank it was transmitted for colleccourt for the eastern district of tion to the Richmond bank, defendNorth Carolina, where it was tried ant herein. without a jury and judgment ren- On December 10, 1920, the Richdered for plaintiffs (281 Fed. 997), mond bank transmitted the check, which was affirmed by the court of together with several other small appeals (291 Fed. 763).
checks, to the Lumber Bridge bank The check was drawn on Novem- for collection and return. The letber 30, 1920, delivered to and re- ter containing these checks, by ceived by plaintiffs, and the amount regular course of mail, should have credited to the drawer.
been received, and, so far as approperly indorsed and deposited pears, was received, by the Lumber with the Perry Banking Company Bridge bank, on Saturday, Decemof Perry, Florida, for collection and ber 11th. On Tuesday, December credit, on December 1. A credit 14th, the check in question was card was delivered to plaintiffs, upon stamped "Paid," and charged to the which was printed: "Checks, drafts, account of the drawer, and on the etc., received for collection or de- same day the Lumber Bridge bank posit, are taken at the risk of the transmitted to the Richmond bank indorser until actual payment is re- its draft on the Atlantic Banking & ceived."
Trust Company, of Greensboro, A statute of Florida, then and North Carolina, for the aggregate ever since in force (Laws of Florida amount of the checks, including the 1909, chap. 5951, p. 146), provides one here in question. The draft as follows:
was received by the Richmond bank “That when a check, draft, or on December 15th, and immediately other negotiable instrument is de- forwarded to the bank at Greensposited in a bank for credit, or for boro for payment. On December collection, it shall be considered due 17th the Greensboro bank notified diligence on the part of the bank in the Richmond bank by wire that the collection of any check, draft, the Lumber Bridge bank did not note or other negotiable instrument have sufficient funds to its credit to so deposited, to forward en route pay the draft. Thereupon the Richthe same without delay in the usual mond bank wired the Lumber commercial way in use according to Bridge bank that its draft had been the regular course of business of dishonored, and called upon it to banks, and that the maker, indorser make it good. The Lumber Bridge guarantor, or surety of any check, bank answered, promising to do so. draft, note or other negotiable in- It failed, however, and the Richstrument, so deposited, shall be lia- mond bank thereupon sent a repreble to the bank until actual final pay- sentative to Lumber Bridge, who ment is received, and that when a reached there on the morning of Debank receives for collection any cember 20th, and demanded pay(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 Bank, 151 Mo. 320, 329, 74 Am. St. terially altering the drawer. 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 be Anderson 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
Bank effect of (Ward v. Smith, 7 Wall. 451, 19 L. pressly permit the
regulation reed. 209); and the acceptance by the acceptance of pay- lieving from
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