Story Case

Harry Forbes of Cairo, Illinois, was indebted to Edward McKay of Chicago, for $500. In order to pay this debt, Forbes purchased a draft from the First National Bank of Cairo, which read as follows:

"May 1,1915. $500. First National Bank, Cairo, 111.

Pay to Edward McKay, or order, five hundred dollars. To The Monroe National Bank Chicago.

George Allen, Cashier."

Forbes sent this draft to McKay. McKay banked with the East Side National Bank of Chicago, a member of the Chicago Clearing House. He indorsed and deposited this draft with that bank to collect it at the Monroe bank. His indorsement was as follows: "Pay to East Side National Bank for account of Edward McKay. - Signed, Edward McKay." At nine o'clock of the morning of May 2,1915, the East Side bank carried this draft with others to the clearing house, and was credited with their total. At ten o'clock the East Side bank failed to open and was taken in hand by the United States Bank Examiner. At one o'clock, according to the custom existing among the banks, the obligations arising that morning were paid at the clearing house, and therefore, at that hour on May 2, the Monroe bank paid the draft in question, having previously charged it to the account of the bank in Cairo.

Because of the failure of the East Side Bank, McKay secured nothing for his draft, since the clearing house used the money paid by the Monroe bank to cover the East Side bank balance. McKay maintains that the Monroe bank wrongfully paid the draft at one o 'clock, when it knew of the failure of the East Side bank; therefore, he tried to hold the Monroe bank. Can he do this?

Ruling Court Case. Crane, Parris And Company Vs. Fourth Street National Bank, Volume 173 Pennsylvania Reports, Page 566

August Crane and Albion Parris, co-partners, trading as Crane, Parris and Company, claim to recover in this suit from the defendants, the Fourth Street National Bank, the sum of $1,990, for losses suffered through the improper payment of a draft in the Clearing House of Philadelphia. At the close of business on the nineteenth day of March, 1891, the plaintiffs, Crane, Parris and Company, mailed at Washington, D. C, a letter to the Keystone National Bank, inclosing a draft for collection, of which the following is a copy:

"$1,900.

The Anglo-California Bank, Limited, No. 38886.

San Francisco, March 13, 1891. Pay to the order of Charles Early, nineteen-hundred dollars.

P. N. Lithenthal, Manager. F. E. Beck, Accountant. The Fourth Street National Bank of Philadelphia. " John Hayes was cashier of the Keystone bank, and therefore Crane, Parris and Company, the plaintiffs, had Early indorse the draft as follows on the back: "Charles Early, pay to the order of John Hayes, Cashier, for account of Crane, Parris and Company, of Washington, D. C."

The draft was originally purchased by Early in California to pay an indebtedness to Crane, Parris and Company, in Washington, and the California bank, by its two officers, drew it on its correspondent in Philadelphia. Crane, Parris and Company had it indorsed, so that the bank in Philadelphia, the Keystone bank, with whom it did business, could collect it. The indorsement shows that when the draft came into the hands of the Keystone bank, it was the property of Crane, Parris and Company, and that the Keystone bank was an agent for collection.

On the morning of March 20, the Keystone bank sent this draft with others to the Philadelphia Clearing House for collection against the Fourth Street National Bank. This was done at eight-thirty o'clock, as was the custom. After the Keystone bank had turned in all of its drafts and checks against the other members of the clearing association, and all of the checks and drafts against the Keystone bank had been put together, it was found that the balance was against the Keystone bank which it should pay in cash to the Clearing House. The Fourth Street bank cleared in the same manner, being credited with its checks and drafts against the Keystone and other banks, and debited with those against it, including the one in question.

At ten-thirty that morning the Keystone bank was closed by the action of the United States Bank Examiner, and the balance on the morning's clearing bill from the Keystone bank was not paid to the Clearing House. There was also a balance due the Clearing House from the Fourth Street Bank, which came as a result of the debit against it of the draft in question and drafts and checks of other banks. This total balance the Fourth Street bank paid at twelve o'clock noon of that day, in accordance with the rules of the Clearing House. The Clearing House, of course, paid this money to the banks to whom the morning clearing showed a credit, and retained that portion covering the balance owing by the Keystone bank.

The Fourth Street bank charged the draft in question to the account of the Anglo-California bank, but refused to pay Crane, Parris and Company, on the ground that the draft was paid by it that morning at eight-thirty to the Keystone bank when the clearing was made. Crane, Parris and Company maintain that the Keystone bank had no ownership of the draft, and that the money was unlawfully paid to a stranger, the Clearing House, at twelve o'clock, after the Keystone bank was closed.

Mr. Justice Williams gave the opinion of the court: "Because of the way the draft was indorsed, it was the property of Crane, Parris and Company until collected. It was never collected by the Keystone bank, the agent, because that bank did not clear on March 20. The Clearing House had no right to demand or receive the amount from the Fourth Street bank. After the Keystone bank became insolvent, its right to collect was revoked, and the proceeds of the draft should have been held by the Fourth Street bank for the owner thereof. Payment to the Clearing House at twelve o'clock on March 20 was payment to a stranger, and was unlawful and worthless as against the real owners. " Judgment is for the full account in favor of the plaintiff, the Fourth Street National Bank.

Ruling Law. Story Case Answer

A Clearing House is not a mutual bank organized and operated by the associated banks; it is merely a device to simplify and facilitate the work of the banks in reaching their daily balances. "A" bank submits all of its claims against the other banks of the association as an aggregate. All of the claims of the other banks against "A" bank are totaled and a balance is struck. If "A's" claims are smaller than all those against it, the bank pays the difference to the Clearing House; if they are larger, the Clearing House pays the difference out of the money paid in from banks whose balances for the day are against them. Until these balances are actually paid in money or in some representative of cash, the transactions are not closed, because the transactions are primarily between bank and bank, and the Clearing House is a mere medium of exchange.

Therefore, in the Court Case, the Judge held that the Keystone bank had not collected the note. It had not received the money, and the mere striking of a balance at eight-thirty was not a payment.

This is true in the Story Case. The draft was not paid at nine o'clock, but at one o'clock. At that hour the East Side bank was closed, its authority to collect had been revoked by its insolvency, and the Monroe bank should have held the draft or its proceeds for McKay, the owner; therefore, he can compel payment from the Monroe bank.