Story Case

A check, indorsed for collection only, was deposited by Roy Watson with the Alexandria State Bank. It was forwarded by that bank to the Boston Mercantile Bank and again forwarded to the Warren County Bank, in the town where the bank was located upon which the check was drawn. It was there paid, on Friday, May 7, and on that day, notice was sent by the Warren County Bank to the Boston Mercantile Bank, to the effect that the amount collected had been credited to the account of the Boston Mercantile Bank. On Saturday, the Boston Mercantile Bank notified the Alexandria State Bank that it had credited that amount against a previously existing account, but that there was still a balance owing to the Boston Mercantile Bank. On the next Monday, the Alexandria State Bank closed its doors and was taken over by a receiver, insolvent. Watson put in a claim for a preferred payment, by reason of the deposit for collection, and was informed that no funds had been received but that the Boston Mercantile Bank had applied the credit to the reduction of the account of the Alexandria State Bank. Watson investigated, and then brought suit against the Warren County Bank, seeking to recover from it the amount collected and to prevent it from paying over the money to the Boston Mercantile Bank. The Warren County Bank replied that it had given a credit to the Boston Mercantile Bank, and that should it pay Watson, it would be doubly liable, since the Boston Mercantile Bank would also hold it for the same amount. Is this a defense, or is Watson entitled to recover?

Ruling Court Case. Manufacturers' National Bank Vs. Continental Bank, Volume 148 Massachusetts Reports, Page 553

The Manufacturers' National Bank of Boston sent forward a check, indorsed to the Fidelity National Bank of Cincinnati for collection. The Fidelity bank sent it on to the Continental Bank for the same purpose. Before the check was collected, the Fidelity bank became insolvent. This was an action by the Manufacturers' bank against the Continental Bank to recover the amount of the check in question, or the check itself.

The Continental Bank contended that it was under a duty to return the proceeds to the Fidelity bank, and not to the Manufacturers' bank, because the check belonged to the former.

Mr. Justice Knowlton said: "The Manufacturers' bank is entitled to recover from the Continental Bank the amount of the check in question. The indorsement to the Fidelity bank for collection did not pass the title to the latter bank, but was simply an appointment of that bank to collect. When that bank became insolvent, the Manufacturers' bank had the right to terminate the agency and demand the paper, if uncollected, or the proceeds, if collected." Judgment was given for the Manufacturers' National Bank.

Ruling Law. Story Case Answer

An indorsement for collection really constitutes the appointing of the indorsee as a collecting agency. The indorsee gets no beneficial title to the paper, and the owner may revoke the authority to collect, and demand the return of the paper at any time before collection. When, however, a bank has collected money upon such paper, unless there is a contrary agreement, it is generally held that then the bank becomes debtor to the owner of the paper, and may mingle, as it pleased, the proceeds of the paper.

The Boston Mercantile Bank had no authority, knowing of the restricted indorsement, to apply the proceeds of the collection to an account of the forwarding bank. Nor can it claim, except for the benefit of Watson, the credit given it by the Warren County Bank. All banks were his agents, and any one of them, if it has not actually forwarded the money, may be held responsible by him. A payment to the Boston Mercantile Bank would protect the Warren County Bank, but a mere credit entry will not. It will be held liable to Watson, and a payment to him will be a complete answer to any demand by the Boston Mercantile Bank. If Watson receives the money, the Boston Mercantile Bank will then be authorized to revoke the credit in favor of the Alexandria State Bank, since a payment would be made only for the purpose of forwarding the money collected to Watson. If he chooses to take it before it has been forwarded in the usual course, he may do so, and the banks are not liable to each other.