1. When paper is indorsed without restriction by a depositor,
and is at once passed to his credit by the bank to which he
delivers it, he becomes the creditor of the bank; the bank becomes
owner of the paper, and, in making the collection, is not the agent
for the depositor. P. 271 U. S.
2. Upon the deposit of paper unrestrictedly indorsed, and credit
of the amount to the depositor's account, the bank becomes the
owner of the paper, notwithstanding a custom or agreement to charge
the paper back to the depositor in the event of dishonor. P.
271 U. S.
3. A depositor who has thus surrendered his rights in paper
which is later dishonored, and whose account, under his agreement
with the depositary bank, has been charged with the amount
previously credited, has no relation with a bank to which the
depositary sent the paper for collection upon the basis of which he
may recover from the second bank for its want of diligence in that
regard. P. 271 U. S. 494
2 F.2d 18 affirmed.
Error to a judgment of the circuit court of appeals which
affirmed a judgment in favor of the Federal Reserve Bank,
defendant, rendered by the district court (300 F. 573) in an action
brought by the City of Douglas to recover the amount of a check,
alleged to have been dishonored, and recharged to the plaintiff,
because of defendant's negligence in failing to collect it.
Page 271 U. S. 490
MR. JUSTICE STONE delivered the opinion of the Court.
The County of Cochise, Arizona, on December 22, 1920, drew its
check on the Central Bank of Willcox, Arizona, in favor of
plaintiff in error, hereafter called plaintiff. Plaintiff delivered
the check indorsed in blank to the First National Bank of Douglas,
Arizona, and that bank credited plaintiff's account and passbook
with the amount of the check. The passbook had printed upon its
face, "All out of town items credited subject to final payment."
The Douglas Bank indorsed the check, "Pay to the order of the El
Paso Branch, Federal Reserve Bank of Dallas," which will be
referred to as defendant, and forwarded it to that bank for
Defendant forwarded the check, in due time, to the drawee bank
at Willcox. The latter debited the drawer's account with the amount
of the check, stamped it "Paid," later returning it to the drawer,
and transmitted to the defendant, in lieu of cash, its own check
upon the Central Bank of Phoenix, in an amount covering this and
other items. The last check was dishonored; both the Willcox Bank
and the Central Bank of Phoenix having failed, the First National
Bank of Douglas received no proceeds of the check, and charged back
the amount of it to the account of plaintiff.
Plaintiff brought suit in the District Court for Western Texas
to recover the amount of the check on the ground that defendant was
negligent in accepting the check of the Willcox Bank in payment,
instead of cash, especially because it was chargeable with notice
that both the Willcox Bank and the Phoenix Bank were then
insolvent. The case was tried without a jury, and resulted in a
judgment for defendant (300 F. 573), which was affirmed by the
Court of Appeals for the Fifth Circuit (2 F.2d 818). The case comes
here on writ of error. See
Page 271 U. S. 491
Code, § 241, § 128, § 24, First (a); Sowell v. Federal
Reserve Bank, 268 U. S. 449
Plaintiff assigns as error the holding of the circuit court of
appeals that defendant was not in such a relationship with
plaintiff as to permit plaintiff to recover for the defendant's
Both plaintiff and defendant concede that it is the rule of the
federal courts that a bank which receives commercial paper for
collection is not only bound to use due care itself, but is
responsible to its customer for a failure to collect, resulting
from the negligence or insolvency of any bank to which it transmits
the check for collection. This is the so-called "New York rule,"
which in effect makes the first bank a guarantor of the solvency
and diligence of the correspondents which it employs to effect the
collection. Exchange Nat. Bank v. Third Nat. Bank,
112 U. S. 276
And see Federal Reserve Bank v. Malloy, 264 U.
, 264 U. S. 164
for a comparison of this rule of liability with the "Massachusetts
rule," by which the initial bank is liable only for its failure to
exercise due care in the selection of an agent to make the
collection. Under the Massachusetts rule, the agent selected
becomes the agent of the owner of the paper, who may maintain an
action directly against it for the negligent performance of its
undertaking. See Federal Reserve Bank v. Malloy, supra,
264 U. S. 164
Compare 26 U. S.
1 Pet. 25, where the undertaking of the initial bank
was to transmit paper for collection.
From this, the defendant argues that, under the rule applied in
the federal courts, the First National Bank of Douglas became
liable by its contract with plaintiff for the negligence of the
defendant; hence that there was no privity of contract between
plaintiff and defendant, and no basis for a recovery, even though
defendant was negligent in accepting an exchange check from the
Willcox Bank. See Federal Reserve Bank v. Malloy, supra,
264 U. S.
Page 271 U. S. 492
This was the view taken by the circuit court of appeals, but the
plaintiff objects that it is not a necessary corollary of the New
York rule, applied in Exchange National Bank v. Third Nat.
that one who deposits paper for collection may
not proceed against a correspondent, selected by the initial bank
for that purpose, for negligent failure to make the collection, and
that neither Exchange Nat. Bank v. Third Nat. Bank
Federal Reserve Bank v. Malloy
so held. It objects also
that, in any event, the rule is not applicable here, because of the
stipulation appearing on the face of the passbook: "All out of town
items credited subject to final payment."
It is said that the effect of this language was to relieve the
initial bank, the First National Bank of Douglas, from the
liability which would otherwise have resulted under the New York
rule, and to make it a mere agent to transmit the paper to
defendant for collection, and thus to make applicable the
Massachusetts rule. See Federal Reserve Bank v. Malloy,
In that case, a local statute relieved the bank
receiving paper for collection from any liability except that of
due care in selecting a subagent for collection and in transmitting
the paper to it, and it was held that the owner of the paper might
proceed against the subagent for negligent failure to collect the
It is not necessary to decide any of these questions here, for
when paper is indorsed without restriction by a depositor, and is
at once passed to his credit by the bank to which he delivers it,
he becomes the creditor of the bank; the bank becomes owner of the
paper, and, in making the collection, is not the agent for the
depositor. Burton v. United States, 196 U.
; Union Electric Steel Co. v. Imperial
286 F. 857; General Amer. Tank Car Corp. v.
296 F. 32, 36; In re Ruskay,
5 F.2d 143;
Scott, cases on Trusts, p. 64, note, par. 8, pp. 66-67.
Page 271 U. S. 493
Such was the relation here between the plaintiff and the Douglas
Bank, unless it was altered by the words printed on the passbook to
the effect that out of town items were credited "subject to final
payment." The meaning of this language, as the cashier of the
Douglas Bank testified, and as the court below held, was that, if
the check was not paid on presentation, it was to be charged back
to plaintiff's account. The check was paid, and the drawer and
indorsers discharged. Malloy v. Federal Reserve Bank,
F. 997; Federal Reserve Bank v. Malloy, 264 U.
, 264 U. S. 166
Nineteenth Ward Bank v. Weymouth Bank,
184 Mass. 49;
Winchester Milling Co. v. Bank of Winchester,
225. Without these words, the relationship between the plaintiff
and the bank was that of indorser and indorsee, and their use here
did not vary the legal rights and liabilities incident to that
relationship, unless it dispensed with notice of dishonor to the
depositor. As was said by the court in Burton v. United States,
supra, 196 U. S.
"The testimony . . . as to the custom of the bank, when a check
was not paid, of charging it up against the depositor's account,
did not in the least vary the legal effect of the transaction; it
was simply a method pursued by the bank of exacting payment from
the indorser of the check, and nothing more. There was nothing
whatever in the evidence showing any agreement or understanding as
to the effect of the transaction between the parties -- the
defendant and the bank -- making it other than such as the law
would imply from the facts already stated."
While there is not entire uniformity of opinion, the weight of
authority supports the view that, upon the deposit of paper
unrestrictedly indorsed, and credit of the amount to the
depositor's account, the bank becomes the owner of the paper,
notwithstanding a custom or agreement to charge the paper back to
the depositor in the event of dishonor. Burton v. United
Page 271 U. S. 494
Brusegaard v. Ueland,
72 Minn. 283; Nat. Bank of
Commerce v. Bossemeyer,
101 Neb. 96, 102; Walker &
Brock v. Ranlett Co.,
89 Vt. 71; Aebi v. Bank of
124 Wis. 73. See Scott v. McIntyre Co.,
93 Kan. 508; Vickers v. Machinery Warehouse & Sales
111 Wash. 576. But see Implement Co. v. Bank,
128 Tenn. 320; Packing Co. v. Davis,
118 N.C. 548.
Plaintiff having thus surrendered its rights in the paper, only
rights arising out of its contract with the initial bank remained.
If those rights were affected by the act or omission of defendant,
they were affected only because that contract so stipulated.
Defendant's duties arose out of its contract with the initial bank,
or out of its relation to that bank as owner of the paper. Hence,
there was no relationship between plaintiff and defendant which
could be made the basis of recovery for defendant's want of