Federal Reserve Bank of Richmond v. Malloy

• Decision Date: 18 February 1924
• Docket Number: No. 553,553
• Parties: FEDERAL RESERVE BANK OF RICHMOND v. MALLOY et al
• Court: U.S. Supreme Court

264 U.S. 160

44 S.Ct. 296

68 L.Ed. 617

FEDERAL RESERVE BANK OF RICHMOND

v MALLOY et al.

No. 553.

Argued Jan. 9, 1924.

Decided Feb. 18, 1924.

Mr. M. G. Wallace, of Richmond, Va., for plaintiff in error.

Mr. Robert H. Dye, of Fayetteville, N. C., for defendants in error.

Mr. Justice SUTHERLAND delivered the opinion of the Court.

Malloy Bros. brought this action against the Federal Reserve Bank of Richmond in a state court, to recover $9,000, alleged to be the amount of a check drawn to their order upon the Bank of Lumber Bridge, N. C. The case was removed to the federal District Court for the Eastern District of North Carolina, where it was tried without a jury, and judgment rendered for plaintiffs (281 Fed. 997), which was affirmed by the Court of Appeals (291 Fed. 763).

The check was drawn on November 30, 1920, delivered to and received by plaintiffs, and the amount credited to the drawer. It was properly indorsed and deposited with the Perry Banking Company, of Perry, Fla., for collection and credit, on December 1. A credit card was delivered to plaintiffs, upon which was printed:

'Checks, drafts, etc., received for collection or deposit are taken at the risk of the indorser until actual payment is received.'

A statute of Florida, then and ever since in force (Laws of Florida 1909, c. 5951, p. 146), provides as follows:

'That when a check, draft, note or other negotiable instrument is deposited in a bank for credit, or for collection, it shall be considered due diligence on the part of the bank in the collection of any check, draft, note or other negotiable instrument so deposited, to forward en route the same without delay in the usual commercial way in use according to the regular course of business of banks, and that the maker, indorser, guarantor or surety of any check, draft, note or other negotiable instrument, so deposited, shall be liable to the bank until actual final payment is received, and that when a bank receives for collection any check, draft, note or other negotiable instrument and forwards the same for collection, as herein provided, it shall only be liable after actual final payment is received by it, except in case of want of due diligence on its part, as aforesaid.'

The Perry Banking Company indorsed and transmitted the check to a bank at Jacksonville, Fla., which, in turn, indorsed and transmitted it, on account of the Atlanta Federal Reserve Bank, to a bank at Atlanta, Ga., and by the latter bank it was transmitted for collection to the Richmond bank, defendant herein.

On December 10, 1920, the Richmond bank transmitted the check, together with several other small checks, to the Lumber Bridge bank for collection and return. The latter containing these checks, by regular course of mail, should have been received, and, so far as appears, was received, by the Lumber Bridge bank on Saturday, December 11th. On Tuesday, December 14th, the check in question was stamped 'Paid' and charged to the account of the drawer, and on the same day the Lumber Bridge bank transmitted to the Richmond bank its draft on the Atlantic Banking & Trust Company, of Greensboro, N. C., for the aggregate amount of the checks, including the one here in question. The draft was received by the Richmond bank on December 15th, and immediately forwarded to the bank at Greensboro for payment. On December 17th the Greensboro bank notified the Richmond bank by wire that the Lumber Bridge bank did not have sufficient funds to its credit to pay the draft. Thereupon the Richmond bank wired the Lumber Bridge bank that its draft had been dishonored and called upon it to make it good. The Lumber Bridge bank answered, promising to do so. It failed, however, and the Richmond bank thereupon sent a representative to Lumber Bridge, who reached there on the morning of December 20th, and demanded payment of the draft from the cashier of the Lumber Bridge bank. The cashier of that bank, after stating that it did not have sufficient funds to pay the dishonored draft, promised that steps would be taken to meet it.

On December 21st the representative of the Richmond bank was informed that the dishonored draft could not be paid, and on the same day the Richmond bank notified the Atlanta bank of the situation, and this notice was promptly transmitted to the plaintiffs. The amount of the check was thereupon charged by the Richmond bank to the Atlanta bank, which, in turn, charged the amount to its immediate correspondent, and so on until it was finally charged back to the plaintiffs.

In view of the conclusion which we have reached, we find it necessary to consider but two questions:

(1) Can the present action be maintained by plaintiffs, Malloy Bros., against the Richmond bank? and (2) If so, did the failure of the Richmond bank to require payment of the Malloy check in money, and its acceptance of what turned out to be a worthless draft in lieu thereof, create a liability against it and in favor of Malloy Bros. for the amount of the loss?

First. The state decisions in respect of the liability of a correspondent bank to the owner of a check forwarded for collection by the initial bank of deposit are in conflict beyond the possibility of reconciliation. A number of states, following the 'New York rule,' so called, have held that there is no such direct liability, but that the initial bank alone is responsible to the owner. On the other hand, an equal, if not a greater, number of states, following the 'Massachusetts rule,' have held exactly the contrary, viz. that the initial bank, by the mere fact of deposit for collection, is authorized to employ subagents, who thereupon become the agents of the owner and directly responsible to him for their defaults. This court, in Exchange National Bank v. Third National Bank, 112 U. S. 276, 5 Sup. Ct. 141, 28 L. Ed. 722, after reviewing the two lines of decisions, approved the 'New York rule.' But the rule may, of course be varied by contract, express or implied. 112 U. S. 289, 5 Sup. Ct. 141, 28 L. Ed. 722. Here the relations of the drawee to the initial bank of deposit are controlled by the Florida statute with respect to which it must be presumed they dealt with each other. This statute had the effect of importing the 'Massachusetts rule' into the contract, with the result that the initial bank had implied authority to intrust the collection of the check to a subagent and that subagent, in turn, to another, and the risk of any default or neglect on their part, rested upon the owners. 112 U. S. 281, 5 Sup. Ct. 141, 28 L. Ed. 722. It follows that the action was properly brought against the Richmond bank.

Second. For the purposes of the case, we assume the correctness of the decision below, holding that the Richmond bank was not negligent in sending the check directly to the bank on which it was drawn, and consider only whether the acceptance of an exchange draft, found to be worthless, instead of money, creates an enforceable liability

It is settled law that a collecting agent is without authority to accept for the debt of his principal anything but 'that which the law declares to be a legal tender, or which is be common consent considered and treated as money, and passes at such at par.' Ward v. Smith, 7 Wall. 447, 452 (19 L. Ed. 207). The rule applies to a bank receiving commercial paper for collection, and if such bank accepts the check of the party bound to make payment and surrenders the paper, it is responsible to the owner for any resulting loss. Fifth National Bank v. Ashworth, 123 Pa. 212, 218, 16 Atl. 596, 2 L. R. A. 491; Hazlett v. Commercial National Bank, 132 Pa. 118, 125, 19 Atl. 55; Bank v. Bank, 151 Mo. 320, 329, 52 S. W. 265, 74 Am. St. Rep. 527; Essex County National Bank v. Bank of Montreal, 7 Biss. 193, Fed. Cas. No. 4532; Noble v. Doughten, 72 Kan. 336, 351, 353, 82 Pac. 1048, 3 L. R. A. (N. S.) 1167; Anderson v. Gill, 79 Md. 312, 317 29 Atl. 527, 25 L. R. A. 200, 47 Am. St. Rep 402; Bank of Antigo v. Union Trust Co., 149 Ill. 343, 351, 36 N. E. 1029, 23 L. R. A. 611. It is unnecessary to cite other decisions, since they are all practically uniform. Anderson v. Gill, supra, presented a situation practically the same as the we are here dealing with, and the Supreme Court of Maryland, in disposing of it, said:

'Now, a check on a bank or banker is payable in money, and in nothing else. Morse, Banks & Banking (2d Ed.) p. 268. The drawer, having funds to his credit with the drawee, has a right to assume that the payee will, upon presentation, exact in payment precisely what the check was given for, and that he will not accept, in lieu thereof, something for which it had not been drawn. It is...