in those states which have the further rule that a deposit for credit is a transfer of the paper to the bank. But it would seem to be right to hold that if the secondary bank becomes insolvent in those states and has at the time the proceeds of collections in its hands, the real owner of the collection could claim that he was a special depositor in the secondary bank, whenever the initial bank can claim a special deposit owing to the form of the indorsements on the paper or other notice.13 The difficulty that arises in such cases shows the absurdity of the rule that the initial bank is not responsible for the correspondent bank's default. As between banks, if the primary bank becomes insolvent owing the secondary bank, this latter bank with the proceeds of collection in its hands can hold them as against the initial bank, but the real owner can compel payment to himself unless the secondary bank can show itself to be a bona fide claimant of the proceeds.15 If it cannot show itself to be a bona fide claimant, the owner of the collection will, of course, force it to make payment to him rather than trust himself to the chances of recovering from an insolvent bank.16 If it is the secondary bank that becomes insolvent having credited the proceeds of the collection to the primary bank, the latter bank has only the claim of a general depositor." If it

paper for collection, the so-called agent could get no better or higher right, except as a bona fide claimant for its own claims.

13 There seems to be no case except Bury v. Woods, 17 Mo. App. 245 (see also Foster v. Rincker, 4 Wyo. 484), which recognizes the rule. One case goes so far as to hold that crediting another bank is not pay. ing it. Boyken v. Bank of Fayetteville, 118 N. C. 566. The decision is correct, no doubt, upon the whole question involved. This particular language is opposed to First Nat. Bank v. Davis, 114 N. C. 343.

This is not a case of an illegal preference, because the collecting bank has a lien upon the proceeds. In this case the secondary bank simply credited the initial bank on what the latter owed to it.

15 See § 188, ante.

16 Such cases are Evansville Bank v. Germ. Am. Bank, 155 U. S. 556; Imp. & Trad. Bank v. Peters, 123 N. Y. 272.

17 Continental National Bank v. Weems, 69 Tex. 489. That it has been credited to the original depositor by the primary bank can make no difference. It has become respon

14 In re Armstrong, 41 Fed. R. 381. sible to him by having received the

can show, however, that the proceeds of the collection were to be held by the secondary bank as a special deposit for it, the initial bank may claim to be a special depositor,18 or if it can show that the secondary bank was insolvent when it took the deposit, the reason of the rule requires that the initial bank should be considered a special depositor.19 But there are some jurisdictions which hold the untenable rule, as we shall hereafter see, that although the owner of a collection can claim a trust by reason of the character in which a bank holds the proceeds of a collection, nevertheless if the trustee so called or bailee has been quick enough to mingle the trust fund with his own property the priority is lost. The doctrine needs but to be stated to show its essential unsoundness.20

proceeds. The same principle governs the relation of the secondary bank to the primary that governs that of the primary bank to the holder of the paper.

Weems, 69 Tex. 489; Hunt v. Townsend, 26 S. W. R. 310.

19 See § 188, ante, as to this rule between depositor and primary bank. It would also apply as be

18 Continental National Bank v. tween banks.

20 See SS 343, 344, post.

CHAPTER IX.

LOANS AND DISCOUNTS.

3

§ 191. Validity of loan.-Unless something in the law or the charter forbids it, a bank may loan either upon personal1 or real-estate security. There have been in certain states banking schemes which compelled the bank to make loans to its stockholders, either upon real-estate security or upon the security of the stock in the bank. Such loans were a preferential lien upon the property mortgaged. Such schemes are now considered unsafe banking, and are rarely heard of, except in times of commercial depression, when crude visionaries revive them as if they were new devices." Where the statute forbids certain loans, either by implication or by positive enactment, the legal result must be ascertained in accordance with principles already pointed out.' Some of these statutes are considered as existing for the pro

1 Biscoe v. Tucker. 11 Ark. 145. 2 Bank of Martinez v. Hemme Co., 105 Cal. 376. But where a bank was permitted to loan to a planter, farmer, miner, manufacturer or other person, a merchant on the principle of noscitur a sociis was held not to be included. Hanover v. Williams, 79 N. C. 129. This is a curious appearance of the vulgar superstition that only those classes which put labor upon a thing by producing it are producers. Of course, labor in getting a thing to a proper market and in place for a sale is just as productive.

3 Instances that may be profitably studied by the vendors of populist

nostrums may be found in Louisiana, Florida and Arkansas. See Dawson v. Real Estate Bank, 5 Ark. 283, and the cases in the next two

notes.

4 Real-estate security: Citizens' Bank v. Nicolas, 3 La. Ann. 112; Mitchell v. Logan, 34 La. Ann. 998; Union Bank v. Parkhill, 2 Fla. 660. Stock of the bank: Nutt v. Citizens' Bank, 22 La. Ann. 346; Mitchell v. Logan, 34 La. Ann. 998.

5 Haynes v. Courtney, 15 La. Ann. 630; Nutt v. Citizens' Bank, 22 La. Ann. 346.

6 Government banks to lend to farmers are excellent specimens. 7 See §§ 32 and 33, ante.

tection of the bank, and others for the protection of borrowers from the bank. Where the statute is made for the protection of the loaning bank, there is no difficulty in permitting a recovery of the loan by the bank, even though the note be void.10 But there is a case which is under a statute making the loan void, and another case which cannot be reconciled with well-understood principles." The statutes which are made for the protection of borrowers as against the bank will be considered under the head of usury.12 But in order that a loan may be enforced against either the surety or the maker of the note, it must appear that the note was actually transferred to the bank. 13

$192. Collaterals. Whether a note taken for a loan be legal or illegal, the loan itself being a good ground of recovery the collaterals therefor may be enforced. It makes little difference in the result upon what principle this relief is granted. A consistent ground would be to say that the depositor of the collaterals cannot object so long as he does not perform his legal and moral duty by paying the loan.

8 Statutes which forbids loans to directors, or to individuals, or upon certain security.

9 Statutes against usury.

10 Nielsville Bank v. Tuthill, 4 Dak. 295; Bond v. Central Bank, 2 Kelly, 92; St. Joseph Ins. Co. v. Hauck, 71 Mo. 465; Van Atta v. State Bank, 9 Ohio St. 27; Smith v. First Nat. Bank, 45 Neb. 444; Rome Sav. Bank v. Kramer, 102 N. Y. 331; Richmond Bank v. Robinson. 42 Me. 589; and see § 33, ante.

11 Mills v. Rice, 6 Gray, 458; Workingmen's Banking Co. v. Rautenberg, 103 Ill. 460. This last case is wrong. The note was a claim presented to the probate court. The loan, at least, was good, and the bank's claim was not forfeited. The dissenting opinion by Judge Dickey,

12 § 196 et seq., post.

13 St. Louis Nat. Bank v. Flanagan, 129 Mo. 178.

1 Real-estate mortgages by national banks are instances. The same result is arrived at by 'denying the debtor relief. Elder v. Ottawa First Nat. Bank, 12 Kan. 238. But the court in this opinion does not see the distinction between a provision which is for the benefit of the bank and a provision in usury laws which is for the protection of the borrower.

The power to take collateral security is one incidental to the banking business.2 The nature of what may be taken as collateral has been already discussed.' But the fact that deposits may be made collateral security for a loan is now settled by competent authority. A common form of collateral is a guaranty of the loan. Such a guaranty requires not only a consideration to the party primarily liable, but a consideration to the guarantor as well. Whether the guaranty is a continuing one or not often causes difficult questions to arise. No species of collateral requires a closer scrutiny upon the part of the banker. Bills of lading accompanying a draft give the bank a lien upon the property to the amount of its advance, even though the bill of lading be not indorsed. This lien has been called the legal title to the goods mentioned in the bill of lading.10 The duty of the bank collecting the draft has been noticed." A bank which holds collaterals may deal with them as it is permitted to do by law, but the fact that the debtor is the president of

12

6

8

2 Comm. Bank v. Nolan, 7 How. N. Y. 502; Deseret Nat. Bank v. (Miss.) 508. Dinwoodey, 53 Pac. R. 215.

3 See § 113, 114, 115, 116, ante. 4 Fisher v. Continental Nat. Bank, 64 Fed. R. 707, 26 U. S. App. 382. In those states which do not recognize the banker's lien, and some have denied it, the bank can protect itself in this way as to a deposit in its own bank. It is difficult to see how such a lien can be made useful upon a deposit in another bank, without a notice and appropriation of the deposit.

5 Cutter v. Everett, 33 Me. 201; Deseret Nat. Bank v. Din woodey, 53 Pac. R. 215. And see 6 Am. & Eng. Encyc. (2d ed.), 692, note 3, 691, note 1. If the guaranty is for a loan contemporaneous with the making of the guaranty and for a future indebtedness, there is a consideration to the guarantor.

6 Agawam Bank v. Steever, 18

7 It should be specifically drawn to cover past advances and obligations (see Deseret Nat. Bank v. Dinwoodey, 53 Pac. R. 215), and must show a consideration.

8 Commercial Bank v. Pfeiffer, 108 N. Y. 242; In re Watch Co., 89 Hun, 196. This lien it may assert against an attaching creditor, though it have the right to charge the draft back to the holder. Am. T. & S. Bank v. Austin, 55 N. Y. Supp. 561.

9 Moss v. Chicago, etc. Ry. Co., 73 Iowa, 226. See Addendum. 10 In re Watch Co., 89 Hun, 196. 11 See § 176, 177, ante

12 The general rules as to collateral securities or pledges govern banks. They are not considered germane to this work.