58

53

59

54

60

61

57

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Connecticut, Illinois, Iowa,55 Kansas,56 Maryland, Massachusetts, Mississippi, Missouri, Nebraska, Pennsylvania," Tennessee, Wisconsin, North Carolina, Kentucky.

63

64

$286. Review of decisions.

65

66

In a review of the decisions, we find that the rule which is established in the State of Massachusetts is, that when an initial bank transmits a collection with proper instructions to a reputable and proper agent where the collection is to be made, it has performed its duty, and is not responsible for the laches, defaults or negligence of the correspondent. This rule, as we have seen, is (with some unimportant variations in language) sustained and held to be the law in the States of California, Connecticut, Illinois, Iowa, Kansas, Maryland, Mississippi, Missouri, Nebraska, Pennsylvania, Tennessee, Wisconsin, Kentucky and North Carolina.

The general rule which may be said to be the New York rule is, as previously stated, that the initial bank is responsible for the negligence, laches and defaults of its correspondents.

This rule is confirmed as the law by the Supreme Court of the United States and by the following States: New York, New Jersey, Ohio, Georgia, Michigan, Minnesota, Montana, South Dakota, Colorado, Texas, Indiana and the Federal Courts discussing the question.

53 Bank r. Scovell, 12 Conn. 303; Lawrence v. Stonington Bank, 6 Conn. 521.

54 Fay . Strain, 32 Ill. 295; Waterloo Mining Co. v. Kuenster, 158 Ill. 259, 41 N. E. 906; Drovers' Nat. Bank . Anglo-American P. & P. Co., 117 Ill. 100; Anderson v. Alton Nat. Bank, 59 Ill. App. 587; Carlinville Nat. Bank v. Wilson, 78 Ill. App. 339, 58 N. E. 250.

55 Guelich . National State Bank, 56 Ia. 434, 9 N. W. 328.

56 Linsbourg Bank r. Ober, 31 Kan. 599, 3 Pac. 324.

57 Citizens' Bank v. Howell, 8 Md. 530.

58 Warren Bank . Suffock, 10 Cush. (Mass.) 582; Fabins v. Mercantile Bank, 23 Pick. (Mass.) 330.

59 Louisville Third Nat. Bank r. Vicksburg Bank, 61 Miss. 112.

60 Daly v. Butchers' Bank, 56 Mo. 94.

61 Omaha First Nat. Bank r. Moline First Nat. Bank, 55 Neb. 303; First Nat. Bank of Pawnee City r. Sprague, 34 Neb. 318, 51 N. W. 846.

v.

62 Hazlett Commercial Nat. Bank, 132 Penn. St. 118; Wingate t. Mechanics' Bank, 10 Penn. St. 104; Bradstreet r. Everson, 72 Penn. St. 124, 13 Am. Rep. 665.

63 Second Nat. Bank r. Cummings, 89 Tenn. 609, 35 Am. Rep. 691; Givan r. Bank of Alexandria (Tenn. Ch. 1898), 52 S. W. 923.

64 Stacy r. Dane County Bank, 12 Wis. 629.

65 Planters & Farmers' Nat. Bank of Baltimore v. First Nat. Bank of Wilmington, 75 N. C. 534.

66 Farmers' Bank & Trust Co. r. Newland, 97 Ky. 464.

The Supreme Court of New York presents its reasons in support of the rule upon the ground "that a contract to do the business covers all the means employed."

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*

*

The Supreme Court of the United States embodies its position in support of the principle and the rule in the following language. It says, "that the distinction between the liabilities of one who contracts to do a thing and that of one who merely receives a delegation of authority to act for another, is a fundamental one. If the agency is an undertaking to do the business, the original principal may look to the immediate contractor with himself, and is not obliged to look to inferior or distant under-contractors or sub-agents when defaults occur injurious to his interest. The nature of the contract is the test."

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With this reasoning in view, a bank that receives a note for collection without entering into a special contract particularly, specifying that it will not be held responsible for the laches and defaults of its agents who may subsequently be engaged to act, is held responsible to the owner of the collection. Therefore, a bank desiring to limit its liability, located in a State where the courts uphold this rule, should, before undertaking to collect for the owner of the collection (if it desires to avoid liability as an agent), enter into a contract with the owner of the paper limiting its liability to place for collection, the paper into the hands of reputable and reliable sub-agents.

A special agreement entered into, will control the rights and liabilities of the parties.

67

The Supreme Court of the State of Michigan, in the case of Simpson v. Waldby, 63 Mich., p. 451, says:

"If I leave an indorsed note against persons in my own town for collection, and consequent demand and protest, I know that some agent or employee of the bank will do the work or some part of it, and I do not inquire who will do it. I contract, however, with the bank that suitable agents will be employed, and hold it responsible for their acts. they wish to avoid such responsibility, it is very easy for them

*

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*

If

67 Exchange Nat. Bank of Pittsburgh v. Third Nat. Bank of New York, 112 U. S. 276.

to accept such business only upon a special agreement as to their duties and liabilities. Failing to do this, I think they must, in taking such bills and drafts, be responsible as other business men are, for the misconduct of their selected agents at home or abroad."

§ 287. When correspondent bank liable to initial bank.

Conceding the rule holding the collecting or initial bank liable to the holder of the collection for defaults of its agents, to be the law, the correspondent bank, must be held liable to the initial bank for its default or negligence.

The authorities supporting the general rule of the initial bank's liability apply here.s

The correspondent bank is liable to the initial bank for the negligence of the agents employed by it, and it is held in the case of National Pahquioque Bank v. First National Bank of Bethel, 36 Conn. 325, that where the cashier of the defendant bank received notes, drafts and checks for collection from the initial bank, that he had ostensibly power and that it was his duty to collect the same, or to protest and return them. Failing to do either, he made the bank liable to the initial bank for their amount."

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288. Where paper total loss.

Where a draft or note is indorsed to a bank for collection by blank or general indorsement, and it undertakes to collect the same and employs an agent if the instrument is lost through negligence, by the agent of the initial bank, the owner may look to the initial bank; and the initial bank may look to its correspondent.

The measure of recovery, when there is a total loss, is the face value of the paper.

Where it appears that a note entrusted to an express company was lost through negligence, the injury is the same as if it had been converted.70

68 Exchange Nat. Bank of Pittsburgh, r. Third Nat. Bank of New York, 112 U. S. 276; Simpson v. Waldby, 63 Misc. 439, 30 N. W. 199: Ayrault v. Pacific Bank. 47 N. Y. 570; Streissguth . National German-American Bank, 43 Minn. 50: Titus r. Mechanics' Nat Bank, 35 N. J. Law, 588.

69 Merchants' Bank of Baltimore 1. Bank of Commerce use of Hoffman, 24 Md. 12, 52.

70 American Express Co. v. Parsons, 44 Ill. 312: Omaha (Neb.) Nat. Bank r. Kiper (Neb.), 82

N. W. 102.

§ 289. Right of creditors to proceeds of collection.

The rights of a creditor of the owner of the collection to garnishee the proceeds, while yet remaining in the initial or collecting bank, depends upon the law or the statute of the State.

The general rule is, that when the collection is in the hands of the initial bank as the property of the owner of the col. lection, and such facts can be established, it is subject to garnishment or attachment.

In the State of Georgia, the rule is laid down as follows: "where the payee of a bill of exchange by indorsing it for deposit to the credit of' himself, he retains ownership not only of the bill but of its proceeds until they are, so disposed."

The collection of proceeds which under the rule as stated may be liable to garnishment or attachment; but, if the initial bank has allowed the owner to draw against the same while the collection is in the hands of a corespondent bank for collection, neither the bank itself or the proceeds would be liable to garnishment in the hands of the corespondent, for the reason that the initial bank has acquired a title thereto by allowing the indorser to draw against the same.

§ 290. Insolvency of initial or corresponding bank affecting proceeds of collection.

If the initial bank becomes insolvent while holding the proceeds of a collection, the owner of the collection is either a general or special depositor. If the funds have been passed to his credit after collection by his instructions, he becomes a general creditor of the bank.

If the proceeds of the collection are not passed to his credit under instruction, and the bank becomes insolvent while holding such funds, they become a special deposit or trust funds and the bank or its assignee or receiver must pay the claim in full.

If the collecting bank becomes insolvent while holding the proceeds of the collection, the owner of the collection in the States which hold the initial bank liable to the owner, is not affected by the insolvency of the corresponding bank. He may look to the initial bank.

The rule as laid down by the Supreme Court of the State of Kentucky, is as follows:

"When a bank receives a draft or note for collection on account or which is the same collection and credit, it does not owe the amount until collected; and though credit be given therefor prior to collection, the bank is not precluded from cancelling such credit which is regarded as only provisional, if the paper is dishonored. On the other hand, the owner of the paper is at liberty to treat the bank as an agent until the proceeds are collected by the bank in money, and an entry of credit by the bank before it has actually received the money, will not bind the owner. Therefore, when the bank has entered the credit and then gone into the hands of a receiver before it has actually received the money from another bank to which it transmitted the paper for collection, the real owner may recover from the latter bank, the proceeds still in its hands. Neither the receiver nor the creditors of the bank which transmitted the paper for collection, have any right to the money. A mere usage between banks, whereby the collecting bank credits the transmitting bank with the amount collected instead of remitting, is not sufficient to deprive the real owner of his. rights."

§ 291. Collection completed when.

A collection is not completed by the bank until the owner is paid in money.

The payment of negotiable paper can only be paid with

money.

Where an agent is employed to make a collection, he cannot accept anything but money in payment. His principal, however, may authorize him to accept something else.

Where a bank holding notes for collection, without authority. from the principal, accepted other notes of the maker, payable to the bank for the principal sum, and credited the bank's account of the payee therewith, surrendering the notes, and no credit was given the account of the payer of the notes as for borrowed money, and no cash passed, and the bankers absconded, and the owner of the surrendered notes brought suit against the maker, it is held that no payment had been made and the owner could recover.71

Where a correspondent bank informs the initial bank, that

71 Scott v. Gilkey, 153 Ill. 168, 39 N. E. 265.