Story Case

In payment of an account, Francis Parker took a note for $523, payable in sixty days, from Sidney Meagher, a customer in a small town some distance from the city where Parker was in business. Parker gave the note to his bank, indorsed it for collection, and it was forwarded to the Barmore Brothers' Bank, in the town where Meagher lived, indorsed by Parker's bank to Barmore Brothers' Bank for collection. Meagher did not pay the note, and suit was brought by the Barmore Brothers' Bank. Meagher defended that, since the indorsements of the note stated that they were for collection only, they had not passed title and that Barmore Brothers, not being the owners, could not bring the suit in their own names. Is this a valid defense to this action?

Ruling Court Case. Drovers' Bank Vs. Hubbell, Volume 117 New York Reports, Page 384

The Drovers' Bank was a banking corporation conducting business in New York City. For many years, Wilkinson and Wilkinson were transacting business as private bankers at Syracuse. The Drovers' Bank was accustomed to forward them checks, drafts, and notes, indorsed for collection. Paper which was payable on demand was immediately credited by Wilkinson and Wilkinson to the Drovers' Bank. Time paper was not credited until paid. Wilkinson and Wilkinson became insolvent, and made an assignment to Hubbell. At this time, Wilkinson and Wilkinson had paper amounting to about $13,000, indorsed to them for collection. After taking charge of the affairs, Hubbell received about $4,000 upon this paper, which he used in paying the claims against Wilkinson and Wilkinson. Drovers' Bank now brings this action to recover the above amount so paid out by Hubbell. It contended that no title ever passed to Wilkinson, but that Wilkinson was only an agent for collection; therefore, the proceeds of the paper were held by Wilkinson, or by Hubbell, in trust for them.

Mr. Justice Beekham said: "The indorsement upon each piece of paper was for collection simply, and by virtue of that indorsement no title passed to the firm, but on the contrary, it became simply the agent of the plaintiff to present the paper, demand payment thereof, and remit it. Under such circumstances, the title to the paper remained in the party sending it." Judgment was given for Drovers' Bank, because Hubbell paid out money which belonged to the bank.

Ruling Law. Story Case Answer

When negotiable paper is deposited with a bank, and indorsed for collection, such an indorsement does not pass full legal title to the bank, or other collecting agent or agency. It merely gives to the collecting agency the authority or power to collect the amount of the paper. In pursuance of this authority, the collecting agency may take such means as are necessary to collect, even to bringing suit upon the paper in its own name; but in any case, it is acting as the agent of the owner of the paper.

An indorsement for collection, whether it is regarded as transferring title to be held in trust, or as conferring a power to sue, is sufficient to sustain an action by the indorsee. The ability to bring suit is one of the most necessary resources for one who has assumed the task of collecting a note. Therefore, while Barmore Brothers' Bank could not use the note or the proceeds as its own, and while it is the agent of Parker, with the duty to him to use due care and diligence, still it may sue on the note as indorsee, and judgment should be given against the defendant Meagher.