City of Douglas v. Federal Reserve Bank of Dallas, 279

• Decision Date: 01 June 1926
• Docket Number: No. 279,279
• Citation: 271 U.S. 489,70 L.Ed. 1051,46 S.Ct. 554
• Parties: CITY OF DOUGLAS v. FEDERAL RESERVE BANK OF DALLAS
• Court: U.S. Supreme Court

271 U.S. 489

46 S.Ct. 554

70 L.Ed. 1051

CITY OF DOUGLAS

v FEDERAL RESERVE BANK OF DALLAS.

No. 279.

Argued April 28, 1926.

Decided June 1, 1926.

Messrs. Harry E. Pickett and C. T. Knapp, both of Douglas, Ariz., for plaintiff in error.

Mr. E. B. Stroud, Jr., of Dallas, Tex., for defendant in error.

Mr. Justice STONE delivered the opinion of the Court.

The county of Cochise, Arizona, on December 22, 1920, drew its check on the Central Bank of Willcox, Ariz., in favor of plaintiff in error, hereafter called plaintiff. Plaintiff delivered the check indorsed in blank to the First National Bank of Douglas, Ariz., and that bank credited plaintiff's account and passbook with the amount of the check. The passbook had printed upon its face, 'All out of town items credited subject to final payment.' The Douglas Bank indorsed the check, 'Pay to the order of the El Paso Branch, Federal Reserve Bank of Dallas.' which will be referred to as defendant, and forwarded it to that bank for collection.

Defendant forwarded the check, in due time, to the drawee bank at Willcox. The latter debited the drawer's account with the amount of the check, stamped it 'Paid,' later returning it to the drawer, and transmitted to the defendant, in lieu of cash, its own check upon the Central Bank of Phoenix, in an amount covering this and other items. The last check was dishonored; both the Willcox Bank and the Central Bank of Phoenix having failed, the First National Bank of Douglas received no proceeds of the check, and charged back the amount of it to the account of plaintiff.

Plaintiff brought suit in the District Court for Western Texas to recover the amount of the check, on the ground that defendant was negligent in accepting the check of the Willcox Bank in payment, instead of cash especially because it was chargeable with notice that both the Willcox Bank and the Phoenix Bank were then insolvent. The case was tried without a jury, and resulted in a judgment for defendant (300 F. 573), which was affirmed by the Court of Appeals for the Fifth Circuit (2 F.(2d) 818). The case comes here on writ of error. See Judicial Code, § 241; Id. § 128 (Comp. St. §§ 1218, 1120); Id. § 24, First (a) being section 991, Comp. St.; Sowell v. Federal Reserve Bank, 268 U. S. 449, 45 S. Ct. 528, 69 L. Ed. 1041. Plaintiff assigns as error the holding of the Circuit Court of Appeals that defendant was not in such a relationship with plaintiff as to permit plaintiff to recover for the defendant's negligence.

Both plaintiff and defendant concede that it is the rule of the federal courts that a bank which receives commercial paper for collection is not only bound to use due care itself, but is responsible to its customer for a failure to collect, resulting from the negligence or insolvency of any bank to which it transmits the check for collection. This is the so-called 'New York rule,' which in effect makes the first bank a guarantor of the solvency and diligence of the correspondents which it employs to effect the collection. Exchange Nat. Bank v. Third Nat. Bank, 112 U. S. 276, 5 S. Ct. 141, 28 L. Ed. 722. And see Federal Reserve Bank v. Malloy, 264 U. S. 160, 164, 44 S. Ct. 296, 68 L. Ed. 617, 31 A. L. R. 1261, for a comparison of this rule of liability with the 'Massachusetts rule,' by which the initial bank is liable only for its failure to exercise due care in the selection of an agent to make the collection. Under the Massachusetts rule the agent selected becomes the agent of the owner of the paper, who may maintain an action directly against it for the negligent performance of its undertaking. See Federal Reserve Bank v. Malloy, supra, 164 (44 S. Ct. 296). Compare Bank of Washington v. Triplett, 1 Pet. 25, 7 L. Ed. 37, where the undertaking of the initial bank was to transmit paper for collection.

From this the defendant argues that, under the rule applied in the federal courts, the First National Bank of Douglas became liable by its contract with plaintiff for the negligence of the defendant; hence that there was no privity of contract between plaintiff and defendant, and no basis for a recovery, even though defendant was negligent in accepting an exchange check from the Willcox Bank. See Federal Reserve Bank v. Malloy, supra, 164 (44 S. Ct. 296). This was the view taken by the Circuit Court of Appeals, but the plaintiff objects that it is not a necessary corollary of the New York rule, applied in Exchange National Bank v. Third Nat. Bank, supra, that one who deposits paper for collection may not proceed against a correspondent, selected by the initial bank for that purpose, for negligent failure to make the collection, and that neither Exchange Nat. Bank v. Third Nat. Bank nor Federal Reserve Bank v. Malloy so held. It objects, also, that in any event the rule is not applicable here, because of the stipulation appearing on the face of the passbook: 'All out of town items credited subject to final payment.'

It is said that the effect of this language was to relieve the initial bank, the First National Bank of Douglas, from the liability which would otherwise have resulted under the New York rule, and to make it a mere agent to transmit the paper to defendant for collection, and thus to make applicable the Massachusetts rule. See Federal Reserve Bank v. Malloy, supra. In that case, a local statute relieved the bank receiving paper for collection from any liability, except that of due care in selecting a subagent for collection and in transmitting the paper to it, and it was held that the owner of the paper might proceed against the subagent for negligent failure to collect the paper.

It is not necessary to decide any of these questions here, for when paper is indorsed without restriction...