knowledge of the hopeless insolvency, however, is fraudulent, and in such case the depositor may rescind the transaction and recover back his deposit from the bank, which becomes a constructive trustee ex maleficio, and holds the deposit for the use of the depositor.18 "A banker, who is, to his own knowledge, hopelessly insolvent, cannot honestly continue his business, and receive the money of his customers, and, although having no actual intent to cheat and defraud a particular customer, he will be held to have intended the inevitable consequences of his act; i. e., to cheat and defraud all persons whose money he receives and whom he fails to pay when he is compelled to stop business." 19 Since the depositor's right of recovery is based on fraud, there can be no recovery, although the bank was insolvent, unless it appears that the insolvency was known to its officers.20 It has been held that the mere fact that the bank was in an embarrassed condition is not enough to prove fraud.21 "The insolvency must be of such a character that it was manifestly impossible for the bankers to continue in business and to meet their obligations, and the fact must have

18 St. Louis & S. F. Ry. Co. v. Johnston, 133 U. S. 566, 10 Sup. Ct. 390, 33 L. Ed. 683; City of Somerville v. Beal (C. C.) 49 Fed. 790; Wasson v. Hawkins (C. C.) 59 Fed. 233; Richardson v. New Orleans Debenture Redemption Co., 102 Fed. 781, 42 C. C. A. 619, 52 L. R. A. 67; First Nat. Bank v. Strauss, 66 Miss. 479, 6 South. 232, 14 Am. St. Rep. 579; Higgins v. Hayden, 53 Neb. 61, 73 N. W. 280; Cragie v. Hadley, 99 N. Y. 131, 1 N. E. 537, 52 Am. Rep. 9; Orme v. Baker, 74 Ohio St. 337, 78 N. E. 439, 113 Am. St. Rep. 968. See "Banks and Banking," Dec. Dig. (Key No.) § 75; Cent. Dig. § 157.

19 Anonymous, 67 N. Y. 598. See "Banks and Banking," Dec. Dig. (Key No.) § 75; Cent. Dig. § 157.

20 Furber v. Dane, 204 Mass. 412, 90 N. E. 859, 27 L. R. A. (N. S.) 808; Perth Amboy Gaslight Co. v. Middlesex County Bank, 60 N. J. Eq. 84, 45 Atl. 704; People v. St. Nicholas Bank, 77 Hun, 159, 28 N. Y. Supp. 407; New York Breweries Co. v. Higgins, 79 Hun, 250, 29 N. Y. Supp. 416. See "Banks and Banking," Dec. Dig. (Key No.) § 75; Cent. Dig. § 157.

21 Quin v. Earle (C. C.) 95 Fed. 728. See "Banks and Banking," Dec. Dig. (Key No.) § 75; Cent. Dig. § 157.

been known to the bankers, so as to justify the conclusion. that the bankers accepted the depositor's money knowing that they would not and could not respond when the depositor demanded it." 22

24

25

If the deposit is in the form of money which has not been mingled with the bank's funds, the depositor can maintain replevin for it; 23 and so, when the deposit is in the form of a check or other paper, so long as it remains in the hands of the bank or receiver. If the deposit is in the form of money, which has been mingled with the bank's funds, the depositor may recover the fund, if it can be identified.2 The right to reclaim the paper or the money in such cases is not precluded by the provisions forbidding preferential transfers and payments, and requiring ratable distribution of the assets among the creditors, since the plaintiff does not claim under a transfer from the bank, but under his original title; that is, he is not seeking to enforce a right as creditor of the bank, but to reclaim his own property obtained by fraud, and while the right may be defeated by the acts or acquiescence of the defrauded party, or because his property has lost its identity and cannot be traced, or because others have innocently ac

22 Williams v. Van Norden Trust Co., 104 App. Div. 251, 93 N. Y. Supp. 821. Sce "Banks and Banking," Dec. Dig. (Key No.) § 75; Cent. Dig. § 157.

23 Furber v. Stephens (C. C.) ing," Dec. Dig. (Key No.) § 75; 24 Richardson v. Denegre, 93 Fed. 572, 35 C. C. A. 452; American Trust & Sav. Bank v. Gueder & Paeschke Mfg. Co., 150 Ill. 336, 37 N. E. 227. See, also, Showalter v. Cox, 97 Tenn. 547, 37 S. W. 286; Bruner v. First Nat. Bank, 97 Tenn. 540, 37 S. W. 286, 34 L. R. A. 532; Hyland v. Roe, 111 Wis. 361, 87 N. W. 252, 87 Am. St. Rep. 873.

35 Fed. 17. Sec "Banks and BankCent. Dig. § 157.

The depositor may recover it from one to whom it has passed who is not a holder in due course. Spring Brook Chemical Co. v. Dunn, 39 App. Div. 130, 57 N. Y. Supp. 100. See “Banks and Banking," Dec. Dig. (Key No.) § 75; Cent. Dig. § 157.

25 Post, p. 354.

quired interests in ignorance of the fraud, the other creditors have no equity to have the plaintiff's property applied in payment of the obligations of the bank.2

CHECKS AND DRAFTS

90. The holder of a check or draft issued by a bank has no right upon its insolvency to a preference over the general creditors.

Since a check does not operate as an assignment of any part of the funds to the credit of the drawer with the drawee, a check given by a bank confers upon the payee no right, upon the drawer's insolvency, to a preference over its general creditors.27 Of course, upon the insolvency of the drawee, the holder of the check, having no rights as against the drawee, has no right to a preference over its general creditors. 28 The certification of a check creates no trust in favor of the holder, and gives no lien on any portion of the assets.2o

26 Cragie v. Hadley, 99 N. Y. 131, 1 N. E. 537, 52 Am. Rep. 9. See, also, Richardson v. Oliver, 105 Fed. 277, 44 C. C. A. 468, 53 L. R. A. 113; Importers' & Traders' Nat. Bank v. Peters, 123 N. Y. 272, 25 N. E. 319; Harris v. First Nat. Bank of Johnson City (Tenn.) 41 S. W. 1084. See "Banks and Banking," Dec. Dig. (Key No.) 75; Cent. Dig. §§ 157, 1116.

27 Jewett v. Yardley (C. C.) 81 Fed. 920; Clark v. Toronto Bank, 72 Kan. 1, 82 Pac. 582, 2 L. R. A. (N. S.) 83, 115 Am. St. Rep. 173; Grammel v. Carmer, 55 Mich. 201, 21 N. W. 418, 54 Am. Rep. 363. See, also, Citizens' Nat. Bank v. Dowd (C. C.) 35 Fed. 340. But see Livingstain v. Columbian Banking & Trust Co., 81 S. C. 244, 62 S. E. 249, 22 L. R. A. (N. S.) 445; ante, p. 127. See "Banks and Banking," Dec. Dig. (Key No.) § 80; Cent. Dig. § 192.

28 Harrison v. Wright, 100 Ind. 515, 58 Am. Rep. 805. See "Banks and Banking," Dec. Dig. (Key No.) § 80; Cent. Dig. § 192.

29 People v. St. Nicholas Bank, 77 Hun, 159, 28 N. Y. Supp. 407. See "Banks and Banking," Dec. Dig. (Key No.) § 80; Cent. Dig. § 192.

SET-OFF

91. A debtor of an insolvent bank may set off against his indebtedness a debt due him from the bank.

As already shown, a depositor has a right to set off a general deposit against his matured debt to the bank, and, upon its insolvency, may exercise this right, even if the debt did not mature until after the insolvency, 30 And in general, in an action by the receiver or assignee of an insolvent bank against a debtor, he may set off against his indebtedness a debt due him from the bank at the time of the insolvency,31 even though such debt had not been matured; 32 but he may not set off a claim against the bank which he has acquired subsequently.3 The right of a bank, or of its receiver or assignee, to apply a deposit to the payment of the depositor's debt to the bank, has been already considered.3

30 Ante, p. 73.

34

31 Brown v. Sheldon State Bank, 139 Iowa, 83, 117 N. W. 289; Finnell v. Nesbit, 16 B. Mon. (Ky.) 351; Salladin v. Mitchell, 42 Neb. 859, 61 N. W. 127; Jackson v. Receivers of People's Bank of Patterson, 9 N. J. Eq. 205; Davis v. Industrial Mfg. Co., 114 N. C. 321, 19 S. E. 371, 23 L. R. A. 322; Armstrong v. Warner, 49 Ohio St. 376, 31 N. E. 877, 17 L. R. A. 466; Farmers' Deposit Nat. Bank v. Penn Bank, 123 Pa. 283, 16 Atl. 761, 2 L. R. A. 273.

Where, on the insolvency of a bank, the lessor of its banking house was indebted to it on a demand note, he was not entitled to set off a claim for damages for breach of the lease by the bank against its claim on the note. McGraw v. Union Trust Co., 135 Mich. 609, 98 N. W. 390. Ser "Banks and Banking,” Dec. Dig. (Key No.) 135; Cent. Dig. §§ 375-379.

32 Steelman v. Atchley (Ark.) 135 S. W. 902, 32 L. R. A. (N. S.) 1060; Citizens' Bank of Greenville v. Kretschmar, 91 Miss. 608, 44 South. 930; In re Receiver of Middle District Rank, 1 Paige (N. Y.) 585, 19 Am. Dec. 452; Smith v. Mosby, 9 Heisk. (Tenn.) 501; post, p. 424. See "Banks and Banking," Dec. Dig. (Key No.) § 135; Cent. Dig. §§ 375–379.

33 Dyer v. Sebrell, 135 Cal. 597, 67 Pac. 1036; Colt v. Brown, 12 Gray (Mass.) 233. See "Banks and Banking," Dec. Dig. (Key No.) 135; Cent. Dig. §§ 375-379. 34 Ante, p. 61.

TIFF.BKS.& B.-23

WRONGFUL

RECEIPT OF DEPOSIT-FOLLOW

ING TRUST FUND-PREFERENCE

92. Where a bank receives a deposit knowing that it has no right to receive it, so that it becomes a constructive trustee of the deposit, the depositor is entitled to recover the deposit, in preference to the general creditors, if he can trace it and identify it, in the hands of the receiver or assignee for the benefit of creditors of the insolvent bank, either specifically, or in the form of other specific property into which it has been converted, or as forming part of a fund for distribution among the creditors, which is larger than it would have been but for the bank's misappropriation. Unless the depositor can so trace and identify the deposit, by weight of authority, he can only come in with the general creditors; but some courts hold that the depositor is entitled to a preference if he can show that the bank received the benefit of the deposit, although he fails so to trace and identify it.

Although the relation between a bank and its depositor is ordinarily that of debtor and creditor, in certain cases, where a bank receives a deposit knowing that it has no right to receive it, it holds the money deposited as a constructive trustee as where it receives the deposit with knowledge of its insolvency, or with knowledge that the deposit is made in violation of a trust.36 In such cases the question arises, upon the bank's insolvency, whether the depositor or other person entitled to enforce the trust must come in with the general creditors or is entitled to a preference.

35

If the deposit is of money which has been mingled with the bank's funds, or of paper the proceeds of which has been collected and so mingled, the depositor could, of course, re86 Ante, p. 44.

35 Ante, p. 349.