Story Case

A note was deposited for collection with the Stil-water Bank, by Samuel Jackson, indorsed by him, "for collection and remittance of proceeds only." As the maker of the note lived in Michigan, the note was sent by the Stilwater Bank to its correspondent in Grand Rapids, the First National Bank of Grand Rapids. It was then sent by this bank to the firm of Huxley and Thorndyke, country bankers, near the place where the maker of the note lived. Huxley and Thorndyke collected the money and sent it to the First National Bank of Grand Rapids by messenger. The messenger was not careful of his packages, and one envelope, containing the currency received in payment of the note of Jackson, was either picked from his pocket or lost by him. Jackson did not receive all of his money. He sued the Stilwater Bank, alleging that the note had been collected, that the money had been lost by the carelessness of an employee of a bank to which the collection had been intrusted by the Stilwater Bank, and that, therefore, the Stilwater Bank was responsible for the loss. This bank replied that it had never been contemplated that the Stilwater Bank would send a special messenger up to Michigan, or do other than send this note through the ordinary channels. It had been sent to a reliable bank, the First National of Grand Rapids, whereby the whole duty of the Stilwater Bank had been discharged.

Is Jackson entitled to recover of the Stilwater Bank, or does its liability cease if it has itself used due prudence in selecting its agent to make the collection, and must Jackson look elsewhere to recover?

Ruling Court Case. O'Hare Vs. The Drovers' National Bank, Volume 119 Illinois Reports, Page 64:6

O'Hare, who lived at Mineral Point, Wisconsin, shipped to Chicago a car load of cattle, consigned to Bensley Brothers, commission men at the Union Stock Yards. He directed Bensley Brothers to sell the cattle, and remit the proceeds to him by sending it to the Henry Bank, at Mineral Point. Bensley Brothers received and sold the cattle, April 11, 1884. The proceeds amounted to $1,053.16, after deducting expenses and commissions. As Bensley Brothers did their banking with the Drovers' National Bank, they made a deposit of this money with the Drovers' bank, accompanying the same with a ticket, showing upon its face that the money was to the credit of the Henry Bank for the use of O'Hare. The Drovers' National Bank issued to Bensley Brothers a certificate of deposit to O'Hare, acknowledging receipt of the money to the credit of the Henry Bank for the use of 0 'Hare. On the eleventh day of April, the Henry Bank failed. On the twelfth day of April, the Drovers' bank transferred this same sum to the Northwestern National Bank to the credit of the Henry Bank, but the Drovers' bank omitted to mention that the funds were for the use of 0 'Hare, but permitted it to be received by the Northwestern National Bank as funds of the Henry Bank. This credit was carried to the account of the Henry Bank, and applied upon indebtedness due from the latter to the Northwestern bank. The Northwestern bank, not knowing, when it received the credit, the nature of it, was in the position of a bona fide holder, and could not be compelled to account to anyone therefor. O'Hare brings this action to recover the money from the Drovers' bank.

When it received this money, insisted O'Hare, it became trustee of it for use of him. It was under a duty to keep it as a trust fund. By depositing it with the Northwestern bank to the general account of the Henry Bank, it violated this duty and enabled the Northwestern bank to retain it for indebtedness owed to it by the Henry Bank. Had the Drovers' bank indicated that the money was for the use of O'Hare, the Northwestern bank could not have applied it in payment of the debt as aforesaid.

Decision: When a person deposits money with a bank specially, and gives specific instructions as to the manner of dealing with, or the depositing of it, the bank must follow such instructions. If loss follows from the failure to follow such instructions, the bank is liable. The Drovers' bank in this case received this specific deposit, with directions to send it to the Henry Bank for the use of O 'Hare. Because of its failure to do so, the money was lost; therefore, it is liable to 0 'Hare for this loss.

Mr. Justice Shope said: "There is no hardship in the rule requiring the bank to preserve the character of the funds received by it, in transmitting the same. All the Drovers' bank had to do to protect itself was to preserve the trust character impressed upon the fund in transferring it to the Northwestern National Bank. If that bank had, with notice of the trust, received this money, it would have held it in the same character it was held by the Drovers' bank, and charged with the same use, and npon failure of the Henry Bank before transmission of the funds to it, would be bound to account to O'Hare for it." Judgment was given for O'Hare.

Ruling Law. Story Case Answer

Since, in the case of a specific deposit, the bank becomes a trustee or bailee of the thing deposited, whether money or negotiable paper, it is under obligation to follow the instructions given by the depositor. If it fails to obey such instructions, and loss results from such failure, it must stand the loss, as any other agent would. But, a loss occurring without any breach of the duties assumed or without any fault on the part of the bank, does not make it liable, even though it is fully solvent and could repay the depositor. The Story Case represents the most common form of specific deposit, negotiable paper deposited for collection. The bank is not a creditor for the amount, but accepts the trust of presenting the paper and holding the money received. It is very common that one bank must co-operate with another, as in our case, to make collections in distant localities. Unfortunately, for the simplicity and uniformity of commercial law, there is a distinct division of the courts of this country upon the question of liability where one bank so employs another bank. In the notable case of Exchange National Bank vs. Third National Bank, Volume 112 United States Supreme Court Reports, Page 276, the Supreme Court held that the bank assumed the obligation of having the instrument collected. It agrees to do it by its own employees, or to find another bank to do it. Since the depositor is not expected to know what agencies are employed, he is given the assurance of the bank with which he deals, and can recover from that bank if any one is at fault. Under this rule, the Stil-water Bank would be liable.

This view is followed by the states of New York, New Jersey, Michigan, Indiana, Colorado, Montana, Texas, Ohio, and others, and is probably the prevailing law today. But in many states of high importance to bankers, the other rule prevails, that if a bank has been careful in selecting a collecting agent, it is not liable for this agent's defalcations. These are Massachusetts, Pennsylvania, Illinois, Iowa, South Carolina, Mississippi, Connecticut, Maryland, Missouri, Wisconsin, Kentucky, Tennessee, North Carolina, Kansas, and Nebraska. The doctrine of these cases is that the depositor knows that another bank will be used by the one with which he deals. Since the first bank has no control over the methods used by the other banks, it is unreasonable to make it liable for the deficiencies of those methods. The agreement really entered into, according to these courts, is merely to pick out a good bank and send the paper to it. On this theory, the Stilwater Bank will not be liable to Jackson.