1. Generally, as held in
Exchange Natl. Bank v. Third Natl.
Bank, 112 U. S. 276,
where a check, deposited by the owner in a bank, is forwarded by it
in due course to another bank for collection, the second bank does
not become responsible, as an agent, to the owner. P.
264 U. S.
164.
2. But it is otherwise where, by a state statute with reference
to which the first bank and the check owner presumably contract,
the forwarding of such instruments for collection, in the regular
course of banking, is to be deemed due diligence acquitting the
forwarding bank of liability until it has received actual payment,
for, in such case, the initial bank has implied authority to employ
another bank as subagent, and this, in turn another, and the risk
of their default or neglect is with the depositor of the
instrument.
Id.
3. If a bank, responsible to the payee for the collection of a
check, surrender the check to the drawee bank and accept in payment
an exchange draft of that bank which proves worthless, the
collecting bank is liable to the payee of the check for the
resulting loss. P.
264 U. S.
165.
Page 264 U. S. 161
4. A regulation of the Federal Reserve Board providing for
authority to Federal Reserve Bank "to send check for collection" to
bank on which they were drawn cannot be enlarged by implication to
include authority to accept a draft of the drawee of a check in
payment. P.
264 U. S.
166.
5. A practice of banks to end checks for collection to the banks
on which they are drawn, with the expectation that they will be
cancelled and charged to the maker and remittance returned either
in currency or by the drawees' exchange drafts, lacks the certainty
and uniformity essential to make it a custom binding the owner of a
check who did not know of it. P.
264 U. S.
169.
6. Assuming that the legal principle forbidding that a check be
entrusted for collection to the bank on which it is drawn, and
requiring payment in money, can be supplanted by custom, the custom
must be as definite and specific as the principles themselves. P.
264 U. S. 171.
291 F. 763 affirmed.
Error to a judgment of the circuit court of appeals which
affirmed a recovery in the district court of the amount of a
check.
MR. JUSTICE SUTHERLAND delivered the opinion of the Court.
Malloy Bros. brought this action against the Federal Reserve
Bank of Richmond in a state court to recover $9,000, alleged to be
the amount of a check drawn to their order upon the Bank of Lumber
Bridge, North Carolina. The case was removed to the federal
District Court for the Eastern District of North Carolina, where it
was tried without a jury, and judgment rendered for plaintiffs, 281
F. 997, which was affirmed by the court of appeals, 291 F. 763.
The check was drawn on November 30, 1920, delivered to and
received by plaintiffs, and the amount credited
Page 264 U. S. 162
to the drawer. It was properly indorsed and deposited with the
Perry Banking Company, of Perry, Florida, for collection and
credit, on December 1. A credit card was delivered to plaintiffs
upon which was printed: "Checks, drafts, etc., received for
collection or deposit are taken at the risk of the endorser until
actual payment is received."
A statute of Florida, then and ever since in force (Laws of
Florida 1909, c. 5951, p. 146), provides as follows:
"That, when a check, draft, note, or other negotiable instrument
is deposited in a bank for credit or for collection, it shall be
considered due diligence on the part of the bank in the collection
of any check, draft, note, or other negotiable instrument so
deposited to forward en route the same without delay in the usual
commercial way in use according to the regular course of business
of banks, and that the maker, endorser, guarantor or surety of any
check, draft, note, or other negotiable instrument so deposited
shall be liable to the bank until actual final payment is received,
and that, when a bank receives for collection any check, draft,
note, or other negotiable instrument and forwards the same for
collection as herein provided, it shall only be liable after actual
final payment is received by it, except in case of want of due
diligence on its part, as aforesaid."
The Perry Banking Company indorsed and transmitted the check to
a bank at Jacksonville, Florida, which, in turn, indorsed and
transmitted it, on account of the Atlanta Federal Reserve Bank, to
a bank at Atlanta, Georgia, and by the latter bank it was
transmitted for collection to the Richmond bank, defendant
herein.
On December 10, 1920, the Richmond bank transmitted the check,
together with several other small checks, to the Lumber Bridge bank
for collection and return. The latter containing these checks, by
regular course of mail, should have been received, and, so far as
appears, was received, by the Lumber Bridge bank on
Page 264 U. S. 163
Saturday, December 11th. On Tuesday, December 14th, the check in
question was stamped "Paid" and charged to the account of the
drawer, and on the same day the Lumber Bridge bank transmitted to
the Richmond bank its draft on the Atlantic Banking & Trust
Company, of Greensboro, North Carolina, for the aggregate amount of
the checks, including the one here in question. The draft was
received by the Richmond bank on December 15th, and immediately
forwarded to the bank at Greensboro for payment. On December 17th,
the Greensboro bank notified the Richmond bank by wire that the
Lumber Bridge bank did not have sufficient funds to its credit to
pay the draft. Thereupon the Richmond bank wired the Lumber Bridge
bank that its draft had been dishonored and called upon it to make
it good. The Lumber Bridge bank answered, promising to do so. It
failed, however, and the Richmond bank thereupon sent a
representative to Lumber Bridge, who reached there on the morning
of December 20th and demanded payment of the draft from the cashier
of the Lumber Bridge bank. The cashier of that bank, after stating
that it did not have sufficient funds to pay the dishonored draft,
promised that steps would be taken to meet it.
On December 21st, the representative of the Richmond bank was
informed that the dishonored draft could not be paid, and on the
same day the Richmond bank notified the Atlanta bank of the
situation, and this notice was promptly transmitted to the
plaintiffs. The amount of the check was thereupon charged by the
Richmond bank to the Atlanta bank, which, in turn, charged the
amount to its immediate correspondent, and so on until it was
finally charged back to the plaintiffs.
In view of the conclusion which we have reached, we find it
necessary to consider but two questions:
1. Can the present action be maintained by plaintiffs, Malloy
Bros., against the Richmond bank? and
Page 264 U. S. 164
2. If so, did the failure of the Richmond bank to require
payment of the Malloy check in money, and its acceptance of what
turned out to be a worthless draft in lieu thereof, create a
liability against it and in favor of Malloy Bros. for the amount of
the loss?
First. The state decisions in respect of the liability of a
correspondent bank to the owner of a check forwarded for collection
by the initial bank of deposit are in conflict beyond the
possibility of reconciliation. A number of states, following the
"New York rule," so called, have held that there is no such direct
liability, but that the initial bank alone is responsible to the
owner. On the other hand, an equal if not a greater number of
states, following the "Massachusetts rule," have held exactly the
contrary,
viz., that the initial bank, by the mere fact of
deposit for collection, is authorized to employ subagents, who
thereupon become the agents of the owner and directly responsible
to him for their defaults. This Court, in
Exchange National
Bank v. Third National Bank, 112 U. S. 276,
after reviewing the two lines of decisions, approved the "New York
rule." But the rule may, of course, be varied by contract, express
or implied.
Id., 112 U. S. 289.
Here, the relations of the drawee to the initial bank of deposit
are controlled by the Florida statute with respect to which it must
be presumed they dealt with each other. This statute had the effect
of importing the "Massachusetts rule" into the contract, with the
result that the initial bank had implied authority to entrust the
collection of the check to a subagent, and that subagent, in turn,
to another, and the risk of any default or neglect on their part,
rested upon the owners. 112 U.S.
112 U. S. 281.
It follows that the action was properly brought against the
Richmond bank.
Second. For the purposes of the case, we assume the correctness
of the decision below holding that the Richmond bank was not
negligent in sending the check directly
Page 264 U. S. 165
to the bank on which it was drawn, and consider only whether the
acceptance of an exchange draft, found to be worthless, instead of
money, creates an enforceable liability
It is settled law that a collecting agent is without authority
to accept for the debt of his principal anything but "that which
the law declares to be a legal tender, or which is be common
consent considered and treated as money, and passes at such at
par."
Ward v. Smith,
7 Wall. 447,
74 U. S. 452.
The rule applies to a bank receiving commercial paper for
collection, and if such bank accepts the check of the party bound
to make payment and surrenders the paper, it is responsible to the
owner for any resulting loss.
Fifth National Bank v.
Ashworth, 123 Pa. 212, 218;
Hazlett v. Commercial National
Bank, 132 Pa. 118, 125;
Bank v. Bank, 151 Mo. 320;
Essex County National Bank v. Bank of Montreal, 7
Biss.193, Fed.Cas. No. 4532;
Noble v. Doughten, 72 Kan.
336, 351, 353;
Anderson v. Gill, 79 Md. 312, 317;
Bank
of Antigo v. Union Trust Co., 149 Ill. 343, 351. It is
unnecessary to cite other decisions, since they are all practically
uniform.
Anderson v. Gill, supra, presented a situation
practically the same as the we are here dealing with, and the
Supreme Court of Maryland, in disposing of it, said:
"Now a check on a bank or banker is payable in money, and in
nothing else. Morse, Banks & Banking (2d ed.) p. 268. The
drawer, having funds to his credit with the drawee, has a right to
assume that the payee will, upon presentation, exact in payment
precisely what the check was given for, and that he will not accept
in lieu thereof something for which it had not been drawn. It is
certainly not within his contemplation that the payee should, upon
presentation, instead of requiring the cash to be paid, accept at
the drawer's risk a check of the drawee upon some other bank or
Page 264 U. S. 166
banker. The holder had a right to make immediate demand for
payment upon receipt of Anderson's check, though she was not bound
to do so. When her agent, the Old Town Bank -- the collecting bank
being the agent of the holder (
Dodge v. Freedman's Sav. &
Tru. Co., 93 U. S. 379) -- did make demand,
it was only authorized to receive money (
Ward v. Smith,
74 U.
S. 451), and the acceptance by the collecting agent of
anything else rendered it as liable to the holder as though it had
collected the cash."
Acceptance of the draft by the Richmond bank as payment of the
Malloy check had the effect of releasing the drawer, and therefore
materially altering the relations of the parties. Technically,
there resulted a transfer of the drawer's funds and his right of
action against the drawee bank, and previous rights and obligations
between the owners of the check and drawer were superseded. It
follows -- this result having been brought about by the
unauthorized act of the Richmond bank, standing in that transaction
in the relation of agent to the owners of the check -- that such
owners are entitled to recover from the Richmond bank for the loss
which they sustained unless the case falls within some exception to
the general rule.
And as to this the Richmond bank says: (1) that its immediate
correspondent, from whom it received the check, was bound by a
regulation of the Federal Reserve Board, which authorized the
method of collection pursued, and that, since that correspondent
was the agent of the owners of the check in the transaction, they
are likewise bound, (2) that the method was justified by a custom,
binding upon Malloy Bros. We consider these contentions in their
order.
1. The regulation relied on, so far as pertinent, is to the
effect that a Federal Reserve Bank will act as agent only in
handling items for member and nonmember banks, who are required to
authorize
"its Federal Reserve Bank
Page 264 U. S. 167
to send checks for collection to banks on which checks were
drawn and, except for negligence, Federal Reserve Banks will assume
no liability."
Regulation J(8) of 1920. This regulation, while it contemplates
the sending of checks for collection to the drawee banks, does not
expressly permit the acceptance of payment other than in money. It
is insisted, however, that the authority to send checks to the
drawee bank carries with it, by necessary implication, authority to
accept a draft in payment from the drawee. We assume for the
purposes of the argument that the obligation which the law imposes
to collect only in money may be varied by a regulation clearly and
positively so providing, although, in terms, it relates only to the
banks
inter se, upon the ground that the owner of the
check is bound by the knowledge and consent of his subagent. But to
justify an extension by implication of the terms of the regulation,
it must be made to appear at least that the addition sought to be
annexed is a necessary means to carry into effect the authority
expressly given by the regulation.
See First National Bank v.
Missouri, 263 U. S. 640. It
follows from this limitation upon the extent and purpose of implied
powers that a distinct and independent power cannot be brought into
existence by implication from the grant of another distinct power.
In other words, authority to do a specific thing carries with it by
implication the power to do whatever is necessary to effectuate the
thing authorized -- not to do another and separate thing, since
that would be not to carry the authority granted into effect, but
to add an authority beyond the terms of the grant. The authority
expressed by the regulation is "to send checks for collection to
banks on which checks were drawn;" the authority now sought to be
annexed by implication is "to accept exchange drafts in payment,"
instead of money as required by law. That neither is a necessary
means of carrying the other into effect is clear. Nor are
Page 264 U. S. 168
they necessary to each other in the sense that they are
corollary or dependent. Certainly a check may be sent for
collection to the drawee bank without entailing the necessity of
remitting the amount in the form of exchange. Currency itself may
be sent, and, as will appear presently, frequently is sent. The
first form of remittance, to be sure, is more convenient, but it is
not of such necessity as to exclude the second on the score of
impracticability. There is nothing to prevent the sending bank from
requiring the drawee to remit currency as a condition upon which
the check may be satisfied and charged to the account of the
drawer. We must not lose sight of the fact that we are here dealing
with two distinct rules of law, both of which are sought to be
avoided: (a) that which forbids a bank having paper for collection
to use the drawee bank as a collecting agent, and (b) that which
forbids a collecting agent accepting anything but money in payment.
The first rule is probably based upon the theory that the drawee is
not a suitable agent for the enforcement of his own obligation, and
that commercial paper calling upon him to pay should not be
surrendered to and satisfied by him, with the consequent release of
the drawer, except upon previous or contemporaneous payment. The
second rule proceeds upon the fact that the obligation of the
drawee is to pay in money, and nothing else. Plainly, the two rules
are of such nature that one may be abrogated without the other, and
it is obvious, since the law imposes upon a collecting agent the
duty to collect in money, that none of the various subagents
receiving the paper to be collected upon the basis of that duty can
waive the requirement of the law in favor of the agent to whom it
is transmitted. Indeed, in transmitting the check here in question
to the Richmond bank, the intermediate banks in effect served only
as instruments for effectuating the transmission. In essence and in
substance, the check was delivered by its owners to the
Page 264 U. S. 169
Richmond bank; it is to that bank, as we have said, they must
look for redress, and the responsibility of that bank is the same
as though the check had been delivered directly to it for
collection by the owners.
In this connection, certain state statutes are also referred to;
but, if applicable, we find nothing in them that justifies a
different conclusion from that reached in respect of the regulation
just considered. Their provisions are in substance the same.
2. Finally, it is urged that the acceptance of the drawee's own
draft, instead of money, was justified by custom. The testimony
relied upon to establish the custom follows:
"The business of check collecting is handled by the Federal
Reserve Bank in a way very similar to that in which it is handled
by collecting banks throughout the country. When one bank receives
checks on another in a distant city, it usually sends them to the
bank on which they are drawn or to some other bank in that city,
and receives settlement by means of an exchange draft drawn by the
bank to which the checks are sent upon some one of its
correspondents.
When checks are sent with the expectation that
the bank receiving them will remit at once, we call it sending for
collection and return. When this is done, the bank upon which the
checks are drawn is expected to cancel the checks and charge them
to the accounts of the drawers, and to remit by means of its
exchange draft or by a shipment of currency. An exchange draft
is used more frequently than a shipment of currency."
It thus appears that the custom, if otherwise established, does
not fix a definite and uniform method of remittance. When checks
are sent for collection and return, the bank is expected to cancel
the checks, and charge them to the account of the drawers, and
remit "by means of its exchange draft of by a shipment of
currency," the
Page 264 U. S. 170
former being used more frequently than the latter. Whether the
choice of methods is at the election of the drawee bank or the
collecting bank does not appear. If it be the latter, it would seem
to result that the election to have remittance by draft, instead of
currency, being wholly a matter of its discretion, or even of its
caprice, as to which the owners are not consulted, would be at its
peril, rather than at the risk of the owners of the check.
But the proof shows that the alleged custom was not known to
plaintiffs, and they could not be held to it without such
knowledge, because, all other reasons aside, by its uncertainty and
lack of uniformity, it furnishes no definite standard by which the
terms of the implied consent sought to be established thereby can
be determined. It furnishes no rule by which it can be ascertained
when an exchange draft shall be remitted and when currency shall be
required, or who is to exercise the right of election.
"A custom to pay two pence in lieu of tithes is good; but to pay
sometimes two pence, and sometimes three pence, as the occupier of
the land pleases, is bad for uncertainty."
1 Bl. Comm. 78. An alleged custom to remit either in exchange or
in currency at somebody's option means nothing more than a practice
sometimes to remit by exchange and sometimes not, and therefore
lacks the essential qualities of certainty and uniformity to make
it a custom of accepting payment by exchange draft binding upon the
owners of the check.
Oerlicks v.
Ford, 23 How. 49,
64 U. S. 62;
Kalamazoo Corset Co. v. Simon, 129 F. 144, 146;
Chicago, M. & St. P. Ry. Co. v. Lindeman, 143 F. 946,
949;
Foley v. Mason, 6 Md. 37, 50;
Wilson v.
Willes, 7 East, 121, 127. A custom to do a thing in either one
or the other of two modes, as the person relying upon it may
choose, can furnish no basis for an implication that the person
sought to be bound by it had in mind one mode rather than the
other.
It is said, however, that there is a custom among banks to
settle among themselves by means of drafts so well
Page 264 U. S. 171
established and notorious that judicial notice of it may be
taken. But the usage here invoked is not that, but is one of
special application to a case where the collection of a check is
entrusted to the very bank upon which the check is drawn and where
payment is accepted in a medium which the contract, read in the
light of the law, forbids. The special situation with which we are
dealing is controlled by a definite rule of law which it is sought
to upset by a custom to the contrary effect. It is not now
necessary to consider the effect of a custom which contravenes a
settled rule of law or the limits within which such a custom can be
upheld.
See Barnard v.
Kellogg, 10 Wall. 383,
77 U. S. 390,
77 U. S. 394.
Decisions upon that question are in great confusion. But, whatever
may be the doctrine in other respects, certainly a custom relied
upon to take the place of a settled principle of law, and therefore
to have the force of law, ought to be as definite and specific in
negativing the principle as the law which it assumes to supplant is
in affirming it.
Judgment affirmed.