Opinion
No. 29693.
February 8, 1932.
1. BANKS AND BANKING. Relationship between depositor of draft for collection and bank held that of principal of agent, and therefore bank received proceeds in trust, entitling depositor to preferred claim on bank's insolvency.
Bank acknowledged receipt of draft, receipt stating that bank credited amount of draft to depositor's account and entered draft for collection. Acknowledgment further gave depositor notice that bank in receiving items for collection acted only as depositor's collecting agent and assumed no responsibility beyond the exercise of due care, and that all items were credited and subject to final payment in cash or solvent credits.
2. BANKS AND BANKING. Bank which cashed checks drawn against draft before collection thereof acquired either ownership of draft or lien thereon for advances.
Bank's right to lien for amount advanced to depositor of draft is in accord with the law of agency, under which an agent in possession, by virtue of his agency, of property belonging to his principal, who advances money to principal, for purposes connected with the agency, acquires, not the ownership of the property, but a lien thereon.
APPEAL from chancery court of Newton county. HON. A.B. AMIS, SR., Chancellor.
Flowers, Brown Hester, of Jackson, for appellant.
The question to be decided is whether or not the draft of the Kraft-Phenix Cheese Corporation was deposited "for collection" or "for credit" as designated by a great many courts and writers "for deposit."
An ordinary deposit in a bank is a loan of the funds to the bank, and such funds so deposited, become the property of the bank and the relation of debtor and creditor exists between the bank and the depositor.
Rice v. Webb, 105 So. 854; Moreland v. Peoples Bank of Waynesboro, 74 So. 828.
A customer of a bank, who deposits checks or drafts upon other banks with his bank, which gives him credit therefor in his general account, which is subject to check, thereby transfers the title to the checks or drafts to the bank, and renders it his debtor to the amount credited to him therefor in the absence of an agreement to the contrary.
Security National Bank v. Old National Bank, 241 Fed. 1.
Where checks and drafts are endorsed and deposited and are accepted as cash they become the property of the bank and the bank becomes the debtor of the depositor in the amount of such checks even though it is understood that the bank has the right to charge back the amount if the paper deposited proves uncollectible.
7 C.J. 635, sec. 314.
Where a bill of lading and draft are deposited with a bank in the usual course of business instead of being deposited for collection and there is not proof of fraud, it will be presumed that such deposit was like any other deposit, being subject to check, wherefore the bank had title to the money involved.
Sears v. Emerson, 182 Ill. App. 522.
The banking usages have grown up as a part of the settled law of the land.
The effect of custom on the rights of the parties is well expressed that the custom of a bank may be proved to interpret, but not to establish, a contract.
Harper v. Calhoun, 7 How. 203; Note 21 A.L.R. 440.
Ordinarily, where paper is indorsed without restriction by a depositor and is at once placed to his credit by the bank, the inference is that the bank has become the purchaser of the paper and in making the collection is not acting as the agent of the depositor.
Equitable Trust Co. v. Rochling, 27 L.Ed. 264, 275 U.S. 248; Aebi v. Bank, 68 L.R.A. 964; Heinrick v. Bank, 113 N.E. 531, L.R.A. 1917A, 655; Bryant v. Williams, 16 F.2d 159.
Where payee endorses a check and deposits it in a bank, with which he was in the habit of dealing, according to the business forms under which transactions of that character are usually conducted. The legal effect of such conduct, where no reservations are made or limitations are imposed by either party, and no agreement or understanding appears other than that which the law implies, is well settled by the best considered cases. When the payee of the check received credit for it, the bank became indebted to him in a sum equal to the amount of the credit, his funds in the bank subject to immediate withdrawal upon his check were augmented to the same extent, the check itself became the property of the indorsee, and the payee's relation to it became that of one who had transferred title to it by indorsement. If the depositor had desired to establish the relation of principal and agent between himself and the depository, he should have indorsed the paper for collection merely, or otherwise should have indicated his purpose, and, if the bank did not intend to accept the check as money, it should have entered it as paper, and not as cash, or otherwise should have made manifest its intention to collect merely.
Noble et al. v. William Doughton, 83 P. 1048, 3 L.R.A. (N.S.) 1167.
While there is not entire uniformity of opinion, the weight of authority supports the view that upon the deposit of paper unrestrictedly indorsed, and credit of the amount to the depositor's account, the bank becomes the owner of the paper notwithstanding a custom or agreement to charge the paper back to the depositor in the event of dishonor.
City of Douglas v. Federal Reserve Bank of Dallas, 70 L.Ed. 1051, 271 U.S. 489; Plumas County Bank v. Rideout, Smith Company, 131 P. 360, 47 L.R.A. (N.S.) 552; Bank of Gulfport v. Smith, 95 So. 785.
Where bank bills are credited at their face to their depositor, and are treated by the depository as money, the bank receiving them becomes a debtor to the depositor for the full amount, although the currency may at the time be depreciated.
Marine Bank v. Fuller Bank, 2 Wall. 252.
If the depositor understands that the bank proposes to receive the paper as money, and assents, expressly or by acquiescence, it would seem that he consents to part with the title to the paper.
St. Louis S.F. Ry. Co. v. Johnston, 27 Fed. 243; H. B. Beer v. Chickasha Nat. Bank, 26 F.2d 39; Bryant v. Williams, 16 F.2d 161.
The holder of a draft or other negotiable paper payable to or indorsed to him is presumed to have a bona-fide title to, and to have paid value for it, and the burden of showing to the contrary is upon him who asserts rights to the proceeds thereof or sets up defenses against it.
Colonial Lumber Co. v. Andelusia National Bank, 138 Miss. 566, 103 So. 343.
It appears to be the uniform holding of the courts that commercial paper sent "for collection" is notice to all parties that the forwarding bank is not the owner of the paper, while many authorities hold that the words "for collection" and "credit" used by a forwarding bank in sending a draft payable to its order, to its correspondent bank, indicate that the forwarding bank is the owner of the paper, and gives the collecting bank the right to apply such paper to the debt of the forwarding bank.
Shawmut Bank v. Barnwell, 140 Miss. 816.
Alexander Alexander, of Jackson, for appellees.
Under the deposit slip the bank originally received the check for collection under the terms as therein stated. By the issuance of this slip it did not become a holder for value.
Bank of Gulfport v. Smith, 95 So. 785.
In the absence of a special agreement the deposit in bank to the credit of a customer of drafts or checks drawn on another bank is, as a general rule, deemed to be for collection merely, and if they are returned dishonored the bank may return them to the depositor and cancel the credit. So where promissory notes are sent to or deposited in a bank for collection, the relation of principal and agent is created and not that of debtor and creditor. Having received the note for collection the bank does not owe the amount to the depositor until collected, though it may give him credit on its books therefor; such a credit may be treated as provisional and if the paper is afterwards dishonored the credit may be canceled. And the same is true where a certificate of deposit issued by one bank is deposited with another. Nor will the mere fact that the depositor is allowed to check against the credit change the import of the transaction, so as to preclude the bank from charging back the amount of the credit if the check deposited is not paid. The bank may permit, as matter of favor and convenience, checks to be drawn against it before payment; the depositor, in the event of non-payment, being responsible for the sums drawn, not by reason of his indorsement, the check not having ceased to be his property, but for money paid.
3 R.C.L. 552 and 563.
The mere crediting of a depositor's account with the full amount of a draft does not constitute the bank a bona-fide purchaser of the draft.
Colonial Lumber Co. v. Andelusia National Bank, 138 Miss. 566, 103 So. 345.
That the title does not pass, in case of paper sent by one bank to another for collection, is true although the receiving bank credits the remitter with the amount of the check as cash and so informs the remitter.
Tyson v. Bank, 77 Md. 412; National Park Bank v. Seaboard Bank, 114 N.Y. 28, 20 N.E. 632; Bank v. Hubbell, 7 L.R.A. 852, 15 Am. St. Rep. 515, 22 N.E. 1031; First National Bank v. Reno County Bank, 3 Fed. 257; Bank v. Ingram, 33 Okla. 46, 124 P. 64; Winchester v. Bank, 120 Tenn. 225, 111 S.W. 248; Bank v. Armstrong, 40 Fed. 46; Bank v. Strauch, 20 Penn. Sup. Court 196; Givan v. Bank, 47 L.R.A. 270, 52 S.W. 923; Morris-Miller Company v. Von Presentin, 63 Wn. 74, 114 P. 912; Re State Bank, 56 Minn. 119, 57 N.W. 336; Michee, Banks Banking, p. 1380; Lane, Banks Banking, p. 315; Magee in Banks Banking, p. 492, 3 R.C.L. 522; Alabama, etc. Bank v. Miller, 77 Ala. 173.
Although endorsed in blank, the bank did not acquire title to checks indorsed and deposited to be transmitted for collection, and the credit to the customer's account given therefor was subject to the right to charge the checks back to such account if payment thereof in cash was not received.
First Nat. Bank v. Federal Reserve Bank, 6 F.2d 339.
A bank, having received paper for collection, does not owe the amount thereof to the sender until collected, and, though it may enter a credit on its books, such a credit may be treated as provisional if the paper is afterwards dishonored and it may cancel the credit.
First Nat. Bank v. Smith Bros. Grain Company, 276 S.W. 951.
In the case of a draft accepted for the special purpose of collection, the fact that the bank credits the customer's account with the amount of the draft, and permits him to draw checks against it immediately and before collection is made, it being agreed that, if collection is not made, the amount of the draft, shall be charged back, does not pass title to the bank, or create the relation of debtor and creditor between the customer and the bank
Midwest Nat. Bank T. Co. v. Parker Corn Co., 245 S.W. 217; Mangum v. Mutual Grain Co., 184 N.C. 181, 114 S.E. 2; Temple v. La. Berge, 184 N.C. 252, 114 S.E. 166; Manufacturer's Finance Co. v. Amazon Cotton Mills Co., 187 N.C. 233.
Where one bank sends to another a draft for collection, duly indorsed, the receiving bank does not become a purchaser of the paper for value although the forwarding bank is indebted to it on account of collection and has failed after the paper was sent. In such cases the real owner of the paper who deposited it with the sending bank, although having indorsed it to that bank, is entitled to stop payment of the draft, or to recover the proceeds if it has been paid.
First Nat. Bank v. Strauss, 66 Miss. 479.
If a collection has not been completed before the collecting bank becomes insolvent, any money thereafter received is the property of the principal, and no change of the relation of principal and agent to that of creditor and debtor can be effected after the insolvency of the bank. And so where paper sent to a bank for collection, is not paid before the insolvency of the bank it remains as against its assignee for the benefit of creditors or in bankruptcy the property of the customer, and does not pass to the assignee or receiver; and if it is collected by the assignee or receiver he is bound to account to the customer therefor. So also one who sends a draft for collection to a bank, which, after being advised by another bank, to which it sends the draft for the same purpose, that it has been collected, credits him with the amount, and afterwards becomes insolvent without having received the proceeds, is entitled to such proceeds from the collecting bank, as against the creditors and receiver of the solvent bank.
3 R.C.L. 635, para. 264.
The insolvency of a bank at once terminates its authority to proceed further, and if collections are afterwards made, or those previously undertaken are completed, the proceeds are held in trust for the owners.
7 C.J., 625, 626; Shawmut Bank v. Barnwell, 140 Miss. 816; Mitchie, Banks Banking, p. 1417; Bolles on Banking, p. 513; Morse, Banks Banking, p. 1215; Beall v. Nat'l. Exchange Bank, 55 Fed. 894, 5 C.C.A. 304; Armstrong v. Boyerton Nat. Bank, 90 Ky. 431, 14 S.W. 411; Nash v. Bank, 67 N.J.L. 265, 51 A. 727; New York, etc. Bank v. Cit. Nat'l Bank, 119 N.C. 307, 25 S.E. 971; American Exchg. Bank v. Theummler, 195 Ill. 90, 88 Am. St. R. 177, 58 L.R.A. 51.
Argued orally by Clyde Hester, for appellant, and by Julian Alexander, for appellee.
On May 16, 1930 the Citizens' Bank of Newton was declared insolvent by the state banking department, and its affairs were being liquidated by a proceeding in the court below under section 3817, Code 1930. The appellee filed a petition praying that the appellant be decreed to hold the sum of two thousand nine hundred twenty-four dollars and eighteen cents of the money received by him as a part of the assets of the bank in trust for it, and that it be given a preference to that extent over the bank's creditors. The decree was in accordance with this prayer. It appears from the agreed statement of facts that on May 13, 1930, the Kraft-Phenix Cheese Corporation drew a draft on itself for the sum of four thousand five hundred seventeen dollars and forty cents, payable to its own order at its office in Chicago, Illinois, wrote its name on the back thereof, and mailed it to the Citizens' Bank of Newton. It received from the bank an acknowledgment of the receipt of the draft reading as follows:
"We have received your favor with inclosures and credit subject to final payment as follows.
"Credit to your account 4517.40.
"Entered for collection.
"PLEASE TAKE NOTICE.
"In receiving items for deposit or collection, this bank acts only as depositor's collecting agent and assumes no responsibility beyond the exercise of due care. All items are credited and subject to final payment in cash or solvent credits."
This draft was credited by the bank to the appellee, was forwarded by it for collection through its ordinary channels therefor, and was collected by an Illinois bank after the Citizens' Bank of Newton was declared insolvent and its affairs taken over by the state banking department. The appellee was not indebted to the Newton Bank at the time this deposit was made; but between that time and the date on which the bank's affairs were taken over by the state banking department, the bank cashed checks of the appellee on it to the amount of one thousand five hundred ninety-three dollars and twenty-two cents, it (the appellee), as we understand the agreed statement of facts, then having no credit on the books of the bank except that for the aforesaid draft.
The question presented for decision is: Did the money collected by the Newton Bank on the draft deposited with it by the appellee become a part of its assets? Or, to state the question differently, when that draft was collected, was the relation between the bank and the appellee, with reference to the draft, that of debtor and creditor, or of principal and agent?
When the bank received the draft and issued its deposit slip therefor, setting forth that it accepted it for collection only and would act "only as depositor's collecting agent," the relation between it and the appellee became that of principal and agent, and not that of debtor and creditor. Bank of Gulfport v. Smith, 132 Miss. 63, 95 So. 785. If this relation continued in force until the bank was declared insolvent and was taken over by the state banking department, the proceeds of the draft, which was thereafter collected, did not, because of the bank's then insolvency, become a part of its assets except to the extent of the money previously advanced by the bank thereon. There was no agreement changing this relation to that of debtor and creditor, unless such an agreement can be implied from the advancement made to the appellee by the bank after the draft was deposited.
When commercial paper is deposited with a bank for collection only, and thereafter the bank cashes checks drawn against the paper deposited before it has been collected, the bank thereby acquires either (a) the ownership of the paper deposited, or (b) a lien thereon for the amount advanced the depositor. While there are authorities to the contrary, the first of these results is not, but the second is, in accord with the law of agency, under which an agent in possession, by virtue of his agency, of property belonging to his principal who advances money to his principal for purposes connected with the agency, acquires, not the ownership of the property, but a lien thereon. But aside from this, "It is a well-established general rule that a bank receiving paper for collection has a lien thereon for a debt of the depositor of such paper to the bank, and is entitled to retain such paper as security for the debt, in the absence of contract express or implied, to the contrary." 6 Michie on Banks and Banking, p. 25, section 19. This question was not decided in the case of the Bank of Gulfport v. Smith, supra. What the court there decided was that a bank with which commercial paper has been deposited for collection, and which thereafter advances money to the depositor on the faith of the deposit, before notice of infirmities in the paper, becomes the holder of the paper in due course for value. This would be true, as pointed out by the Washington case there cited, Old National Bank v. Gibson, 105 Wn. 578, 179 P. 117, 6 A.L.R. 247, and relied on, whether the bank became the owner of the paper, or merely acquired a lien thereon for the money advanced. It was not necessary, therefore, for the court to, and it did not, there decide whether the bank owned the paper deposited, or merely had a lien on it.
Affirmed.