Story Case

The Grain Exchange Bank and the Garfield Park Bank were both members of the Chicago Clearing House. Every day, each bank sent to the clearing house all the checks or drafts upon other member banks which it had received, and during the morning each bank would receive all the items against it which had been turned in. It would then be charged or credited with the balance, according as it was on the side of total checks against the bank, or of items deposited. There was a rule of the clearing house that any check not acceptable among those returned and charged against a member bank, must be returned to the bank which indorsed it to the clearing house, before three o 'clock of the same day. One day, the Grain Exchange Bank found in the bundle of checks received by it at the clearing house, one drawn by a customer whose account had been closed out months before. The check had been cashed and turned in to the clearing house by the Garfield Park Bank, and it was returned to that bank at one o 'clock with a demand for payment. The Garfield Park Bank denied that it was liable on a check which had once been paid, and this suit was brought. The Grain Exchange Bank contended, first, that such a payment as the daily clearings was not a bar to recovery if there had been a mistake, and, second, that this check had never been paid, since on that day there had been a credit balance at the clearing house in favor of the Grain Exchange Bank. For which bank should the judgment be given!

Ruling Court Case. Merchants' National Bank Vs. National Eagle Bank, Volume 101 Massachusetts Reports, Page 281; Volume 100 American Decisions, Page 120

A customer of the Merchants' National Bank drew a check upon it, and at the time the customer had insufficient funds on deposit to cover the amount of the check. It was taken by the National Eagle Bank, and sent by it through the clearing house, and paid by the Merchants' National Bank under the mistaken belief that the customer had money on deposit.

Both banks were members of the Boston Clearing House, a voluntary association of banks. An early hour in each day was fixed for making the exchange of checks and drafts, and a later time in the day for receipt and payment of balances due from the debtor banks. These settlements were made, not from an examination in detail of the voucher presented, but from memoranda and tickets accompanying them. Any mistake resulting from a settlement was settled directly between the banks concerned. It was provided that "whenever checks are sent through the clearing house which are not good, they shall be returned by the bank receiving the same to the banks from which they were received, as soon as it shall be found that said checks are not good, and in no case shall they be retained after one o'clock."

In this case, the Merchants' National Bank did not discover the worthlessness of the check in question until after one o'clock. It was then returned immediately to the Eagle Bank. The Eagle Bank refusing to make it good, this suit was brought by the Merchants' Bank to recover the amount, as money paid under a mistake of fact.

It was contended by the Eagle Bank that, by the clearing house rules, since this check was not returned by one o 'clock, it was too late.

Mr. Justice Colt said: "It is plain, in the case here presented, that if the plaintiff had paid this check at its own counter, under a mistake of fact, it could have maintained this action to recover it. Is there anything in the manner in which the payment was in fact made, or in the relation of the parties to each other as members of the clearing house association, which prejudicially affects this right?"

Under the arrangement made by the clearing house, adverted to in the facts above, "the payment required of the clearing house to a creditor bank upon a check presented, must be regarded as only provisional until the hour of one o'clock, to become complete only in case the check is not returned at that time. And if, by any mistake of fact, the return of the check is not so made, then, as between the two banks, it is to be treated as a payment made under a mistake of fact precisely to the same extent, and with the same right to reclaim, which would have existed if the payment had been made by the simple act of passing the money across the counter directly to the payee on the presentation of the check." Judgment was given for the Merchants' National Bank.

Ruling Law. Story Case Answer

A clearing house is a voluntary association of banks in a given city, the purpose of which is to effect exchange and settlement of all obligations between the banks. At some hour on each day, at some place, representatives of all the associated members meet. Each representative turns in all demands which it has against the other banks, and is given credit therefor. Each bank is likewise charged with all demands against it. If there is more owing to it than it owes, it is called a creditor bank, and is paid the amount in excess of the demands against it. In case the demands against it are greater than its demands against other banks, it is a debtor bank, and it pays into the clearing house the difference between the amount owed to it and the amount it owes. If there are any worthless checks among such demands, these are settled by the two banks concerned. Usually, it is provided that worthless checks must be returned by a given hour. In New York and Boston it is held that such a rule does not preclude a recovery upon a check paid under a mistake of fact in the clearing house, even after the hour, if the bank which received the check has not changed its situation meanwhile. It was mentioned, under the cases on "Payment under Mistake," that New York and Massachusetts did not follow the general rule, but were alone in the stand that a payment made where the depositor did not have funds could be recovered.

In the Ruling Court Case, because of this rule, it was held that the Merchants' National Bank could recover, in spite of its having exceeded the clearing house requirement of returning checks by one o 'clock. In the Story Case, where the Grain Exchange Bank could not have recovered if it had made the payment over its own counter, it is able to recover because of the agreement made by the Garfield Park Bank, in becoming a member of the clearing house. The check was really paid, although no money passed from the Grain Exchange Bank, because it was applied in the settlement of items due. But the payment was made under circumstances in which the bank could not have investigated the validity of the check, and against which it had protected itself by the rules of the clearing house, which all the members had established. Because of these rules, the Grain Exchange Bank is entitled to recover, and judgment should be given for the plaintiff. If the check had not been returned within the time fixed by the clearing house rules, the payment would have become complete, and could not have been recovered, in spite of the mistake.