1. National banks are subject to state laws insofar as these are
consistent with the policy and provisions, express or implied, of
the National Bank Act or other federal statutes. P. 294 U. S.
2. Under § 2 of the Bank Collection Code, as adopted in Indiana,
the relation between a bank forwarding a check for collection and
the collecting bank is that of principal and agent, until the agent
has finished the business of collection. P. 294 U. S.
3. In the absence of tokens of a contrary intention, the better
common law doctrine is that the agency of a collecting bank is
brought to an end by the collection of the paper, the bank being
from then on in the position of a debtor, with liberty, like
debtors generally, to use the proceeds as its own. P. 294 U. S.
4. A collecting bank need not collect in cash if another way has
the sanction of law or custom to which the parties may be held to
have impliedly consented. P. 294 U. S.
5. Under § 9 of the Bank Collection Code of Indiana, a
collecting bank, as agent, is not under a duty to collect for cash
but may collect by having the collection item set off against
checks owed by itself, in a local clearinghouse transaction in the
Page 294 U. S. 217
and thereafter the liability of the bank to the forwarder or
owner is that of a debtor. P. 294 U. S.
6. A national bank in Indiana became insolvent after collecting
a check by a local clearing wherein the check was set off against
checks of greater amount owed by the bank itself. Held
that, in the absence of wrongdoing, there is no ground for
impressing the bank's assets with a constructive trust in favor of
its principal, and neither is there ground for an implied trust,
since the money proceeds of the transaction did not come into the
bank as an identifiable fund, but merely went to reduce its
liabilities, and to infer that a trust was transferred from the
proceeds to an equivalent portion of the bank's cash resources
would be without warrant in the intention of the parties. Pp.
294 U. S.
7. A debt does not furnish a continuum upon which a trust can be
imposed after cancellation or extinguishment has put the debt out
of existence. P. 294 U. S.
8. As applied to a national bank, § 13 of the Indiana Bank
Collection Code, purporting to make the owners of paper which the
bank has collected but for which they have not been satisfied,
preferred claimants, in the event of the bank's failure, upon all
of its assets, irrespective of whether the funds representing their
paper call be traced or identified as part of such assets or as
intermingled with or converted into other assets of the bank, is
inconsistent with the system of equal distribution established by
federal law (R.S., § 5236), and is therefore invalid. P.
294 U. S.
71 F.2d 618 reversed.
Certiorari, 293 U.S. 543, to review the affirmance of a judgment
of the District Court, 4 F. Supp. 569, in an action, brought
originally in an Indiana court, by the payee of a check, against a
national bank and its receiver, to impress a trust upon its
Page 294 U. S. 218
MR. JUSTICE CARDOZO delivered the opinion of the Court.
A trust has been impressed upon the assets of a national bank in
the hands of a receiver for the proceeds of a check collected
through a clearinghouse before the closing of the bank by the
Comptroller of the Currency. The question is whether the trust may
On December 29, 1931, the Commercial Trust Company of Gary, Ind.
as maker, delivered to the respondent, United States Fidelity &
Guaranty Company, a check to the order of respondent in the sum of
$2,196.89 upon the Gary State Bank of Gary, Ind. as drawee. The
check, duly indorsed by the payee, was deposited in a bank in
Indianapolis, and thereafter was transmitted for collection to the
National Bank of America at Gary, Indiana, being received for that
purpose on December 31, 1931. At that time, both the collecting
bank (the National Bank of America) and the drawee bank (Gary State
Bank) were members of the Gary Clearing House Association. In
accordance with banking custom, the National Bank of America
delivered to the local clearinghouse whatever checks in its
possession were payable by the member banks (a total of $10,425.45)
including the foregoing item of $2,196.89, and received in return
the checks drawn on itself ($11,470.19). The outcome was a debit
balance of $1,044.74, which it paid on the same day by a draft,
thereafter duly honored, to the order of the clearinghouse. At the
same time, it delivered to the forwarding bank in Indianapolis a
draft for $3,660.83, which covered, along with other items, the
check for $2,196.89, collected from the drawee in the manner just
described. Before the draft so transmitted could be honored, its
maker, the collecting bank, had been forced to close its doors
(January 4, 1932), and the Comptroller of the Currency was in
possession of the business.
Page 294 U. S. 219
This action, which was begun in a state court in Indiana and was
thereupon removed to a United States district court, was brought by
the United States Fidelity & Guaranty Company, payee of the
check for $2,196.89, against the collecting bank and Jennings, its
receiver, to impress a trust upon the assets to the extent of the
proceeds of collection, and for payment accordingly. The District
Court held that the payee was entitled to a preference over the
general creditors of the insolvent bank, and entered a decree for
the face amount of the check with interest. United States
Fidelity & Guaranty Co. v. National Bank of America,
Supp. 569. Upon appeal to the Circuit Court of Appeals for the
Seventh Circuit, the decree was modified as to the interest, and as
modified affirmed. National Bank v. United States Fidelity
& Guaranty Co.,
71 F.2d 618. A writ of certiorari brings
the case here.
There was in force in Indiana in 1931 a statute known as the
Bank Collection Code (Indiana Acts 1929, c. 164 [Footnote 1
]), which is applicable to national
banks insofar as it is consistent with the policy or provisions,
express or reasonably implied, of the National Bank Act or of other
federal acts of paramount authority. Lewis v. Fidelity &
Deposit Co. of Maryland, 292 U. S. 559
292 U. S. 566
First National Bank v. Missouri, 263 U.
, 263 U. S. 656
Under that Code (§ 2), the relation between the forwarding bank and
the collecting bank is that of principal and agent until the agent
has completed the business of collection. Whether a fiduciary
relation continues even afterwards, upon the theory that the
proceeds of the collection until remitted to the forwarder are
subject to a trust, depends upon the circumstances. In the absence
of tokens of a contrary intention, the better doctrine is, where
the common law prevails, that the agency of the collecting bank is
Page 294 U. S. 220
to an end by the collection of the paper, the bank from then on
being in the position of a debtor, with liberty, like debtors
generally, to use the proceeds as its own. Commercial Bank of
Pennsylvania v. Armstrong, 148 U. S. 50
Marine Bank v. Fulton County
2 Wall. 252; Planter's
Bank v. Union Bank,
16 Wall. 483, 83 U. S. 501
Hecker-Jones-Jewell Milling Co. v. Cosmopolitan Trust Co.,
242 Mass. 181, 185, 186, 136 N.E. 333; Freeman's National Bank
v. National Tube-Works,
151 Mass. 413, 418, 24 N.E. 779;
Manufacturers' National Bank v. Continental Bank,
Mass. 553, 558, 20 N.E. 193; First National Bank of Richmond v.
Wilmington & W. R. Co.,
77 F. 401, 402; Philadelphia
National Bank v. Dowd,
38 F. 172, 183; Merchants' &
Farmers' Bank v. Austin,
48 F. 25, 32. [Footnote 2
"One who collects commercial paper through the agency of banks
must be held to impliedly contract that the business may be done
according to their well known usages, so far as to permit the money
collected to be mingled with the funds of the collecting bank."
Freeman's National Bank v. National Tube-Works, supra.
There is a contention for the respondent that the rule at common
law has been modified by statute. We shall consider later on
whether the change, if any, is material upon the record now before
At the closing of its doors on January 4, 1932, the collecting
bank at Gary had finished the business of collection, and had
arrived at the stage when it was subject to a duty, either as
trustee or as debtor, to make remittance of the proceeds. In the
method of collection, there had been no departure from the ruling
of this Court in Federal Reserve Bank v. Malloy,
264 U. S. 160
that an agent bank is at fault when it accepts anything but cash in
the absence of custom or agreement for the acceptance
Page 294 U. S. 221
of a substitute. To preclude the extension of that ruling to
collections through a clearinghouse the Bank Collection Code makes
provision in § 9 for media of payment that are to be deemed
equivalent to currency. There may now be acceptance of a bank
draft, or settlement through a clearinghouse in the customary
manner, without involving the agent in liability for damages if the
draft is dishonored or the credit subsequently revoked. [Footnote 3
] On the other hand, when
credit ceases to be provisional, or when the accepted instrument is
paid, the collecting bank is liable as debtor, if not otherwise, to
the same extent as if payment had been made in cash over the
counter. One duty (the duty to collect) is at an end, and another
(the duty to remit) has arisen in its place.
To say that a collecting agent may be held to the liability of a
debtor "as if" payment had been made in cash is not to say that the
two methods of collection are
Page 294 U. S. 222
equivalent for every other purpose. More particularly, it does
not mean that they are equivalent for the purpose of identifying a
to be subjected to a trust. The distinction is made
definite by the controversy before us. What happened in the
clearinghouse was this, that a check for $2,196.89, due to the
collecting bank as agent or fiduciary, was used to cancel or
extinguish liability upon a check or checks of equal amount due
from it as principal, all with the sanction of statute and with the
tacit assent of the forwarder or owner. At the close of the day,
there was not a dollar in the treasury of the agent that could be
identified as part of the proceeds of collection or as a substitute
therefor. If the money had been paid over the counter with the
understanding that it was accepted as a special deposit (Blakey
v. Brinson, 286 U. S. 254
286 U. S.
-263; People v. City Bank of Rochester,
N.Y. 32; Genesee Wesleyan Seminary v. United States Fidelity
& Guaranty Co.,
247 N.Y. 52, 55, 159 N.E. 720), the
doctrine of a continuing trust would charge the agent with a duty
to set the proceeds of collection apart from other assets, and hold
them intact for transmission to the forwarder. Nothing of the kind
was done. Nothing of the kind was required or expected to be done.
On the contrary, the statute gave notice to the agent that, instead
of establishing a trust, it was at liberty to set off what was due
to it in one capacity against what was owing by it in another,
being liable, however, as debtor when the setoff became final.
We are not concerned at this time with a constructive trust in
the strict sense, a trust ex maleficio,
which may be
fastened upon a wrongdoer irrespective of intention. Pomeroy,
Equity Jurisprudence, vol. 1, § 155; vol. 3, §§ 1044, 1046. There
was no wrongdoing here, but conduct wholly regular, with the result
that any trust existing must be one implied in fact. In that
situation, there is no basis for a holding that a trust was
Page 294 U. S. 223
from the proceeds of collection to an equivalent part of the
cash resources of the agent, the beneficial interest of the
principal being unaffected by the set off. Cf. Knatchbull v.
13 Ch.Div. 696; Central National Bank v.
Insurance Co., 104 U. S. 54
104 U. S. 68
Schuyler v. Littlefield, 232 U. S. 707
draw such an inference, far from promoting intention, would ignore
and override it. By a permitted course of dealing, the proceeds of
the check, instead of being deposited upon collection in the vaults
of the collecting agent, were specifically appropriated to the
discharge of other obligations. There was not even a partial or
proportionate payment that could have found its way into the
vaults, for the balance at the close of the operations of the day
was adverse to the collector and in favor of the clearinghouse.
These being the facts, there is no room, in our view, for the use
of those presumptions that affect the conduct of a wrongdoer who
draws upon a mingled fund made up of his own moneys and another's.
Knatchbull v. Hallett, supra; Central National Bank v.
Insurance Co., supra.
The presumption collapses when there is
neither trust nor wrong.
For the purposes of this case, we do not need to determine
whether the Bank Collection Code has changed the preexisting rule
whereby, in the absence of tokens of a contrary intention, a bank
ceases to be an agent and is turned into a debtor when collection
is complete, without reference to the form or manner of the
payment. If we assume for present purposes that a trust will attach
under the statute when the proceeds of the collection are in the
hands of the collector, the assumption will not hold where there
are no proceeds of collection that have ever come into his hands,
or where such proceeds as there were have been so mingled and
confused that it is impossible to follow them. Currency paid over
the counter and deposited in a vault is a thing that can be
identified, and so subjected to a trust whenever in equity and
Page 294 U. S. 224
a trust should be implied. Not only that, but a trust so created
will not fail though other dollars may have taken the place of
those originally received, for dollars are fungibles, and any one
of them will be accepted as a substitute for another.
Knatchbull v. Hallett, supra.
But the situation is very
different when what has been received by the collecting agent is
not a thing at all, but a reduction of liabilities by setoff or
release. Blakey v. Brinson, supra; People v. Merchants' &
78 N.Y. 269, 272, 273;
Hecker-Jones-Jewell Milling Co. v. Cosmopolitan Trust Co.,
242 Mass. 187, 136 N.E. 333; City Bank v.
75 F. 771; Anheuser-Busch Brewing Association
56 F. 759; Farmers' National Bank v.
15 F.2d 175, 176; Dickson v. First National
26 F.2d 411; Schilling v. Rowe,
64 F.2d 188,
190; Allied Mills v. Horton,
65 F.2d 708, 710; Smith
69 F.2d 5, 6, 7; First National Bank of St.
Petersburg v. City of Miami,
69 F.2d 346; Wisdom v.
69 F.2d 349. [Footnote
] A debt does not furnish a continuum upon which a trust can
be imposed after cancellation or extinguishment has put the debt
out of existence.
The truth of this statement, though obvious enough upon its
face, finds point and confirmation when the benefit, if any,
accruing to the debtor is viewed as of the time of insolvency or
later. What was done by the collecting bank through a settlement in
the clearinghouse has not increased the assets available for
distribution in the hands of the receiver. What was done through
that settlement has had no effect after insolvency except to
diminish liabilities. The dividend that would be due upon the debts
cancelled through the set off if they were now
Page 294 U. S. 225
to be revived is the measure of any benefit accruing to the
creditors. Decisions of other courts, to the extent that they give
support for a different conclusion, are built, as we think, upon an
inadequate analysis, and do not win our approval. [Footnote 5
] It is the benefit to the
creditors, not the loss to the respondent, that marks the gain to
the fund now held by the receiver. If the respondent is permitted
to prove against the assets on a parity with other creditors, the
share thus allotted will correspond accurately to whatever
accretion has resulted from the act of set off and cancellation in
the operations of the clearinghouse.
One other section of the Bank Collection Code is still to be
considered. This is § 13, which has to do, as its caption
indicates, with the procedure following insolvency. What is
regulated in that section is not the relation between a bank and
its correspondents during the normal course of business. What is
regulated is the relation and the remedy when insolvency has set in
and business is suspended. [Footnote 6
] Then for the first time a trust comes into
Page 294 U. S. 226
being through the action of the statute, a trust coextensive in
its subject matter with all the assets of the bank, irrespective of
their nature, and yet a trust for a special class, the owners of
negotiable instruments whose debts remain unsatisfied after payment
of the paper has been collected by the agent. Cf. Spradlin v.
Royal Manufacturing Co.,
73 F.2d 776.
"Such owner or owners shall be entitled to a preferred claim
upon such assets, irrespective of whether the fund representing
such item or items can be traced and identified as part of such
assets or has been intermingled with or converted into other assets
of such failed bank."
A trust so created, to arise upon insolvency, is a preference
under another name. As applied to a national bank, the preference
is plainly inconsistent with the system of equal distribution
established by the federal law. R.S. § 5236, 12 U.S.C. § 194;
Davis v. Elmira Savings Bank, 161 U.
, 161 U. S.
-284; Easton v. Iowa, 188 U.
, 188 U. S. 229
Cook County National Bank v. United States, 107 U.
; Texas & Pacific R. Co. v. Pottorff,
291 U. S. 245
Lewis v. Fidelity & Deposit Co. of Maryland, supra.
The power of the nation within the field of its legitimate exercise
overrides in case of conflict the power of the states.
The decree is reversed, and the cause remanded for further
proceedings in accordance with this opinion.
The Code is stated to have been adopted in as many as eighteen
states. It was framed by counsel for the American Bankers
Association in an endeavor to promote uniformity of banking
practice in the collection of commercial paper.
The decisions to the contrary are criticized in
Hecker-Jones-Jewell Co. v. Cosmopolitan Trust Co., supra,
and additional decisions are collected by Scott, cases on Trusts,
pp. 67, 68.
"Where ordinary care is exercised, any agent collecting bank may
receive in payment of an item without becoming responsible as
debtor therefor, whether presented by mail, through the clearing
house or over the counter of the drawee or payor, in lieu of money,
either (a) the check or draft of the drawee or payor upon another
bank or (b) the check or draft of any other bank upon any bank
other than the drawee or payor of the item or (c) such method of
settlement as may be customary in a local clearing house or between
clearing banks or otherwise: Provided,
That whenever such
agent collecting bank shall request or accept in payment an
unconditional credit which has been given to it on the books of the
drawee or payor or on the books of any other bank, such agent
collecting bank shall become debtor for such item and shall be
responsible therefor as if the proceeds were actually received by
it in money."
The time within which credit, when once given, may be revoked is
defined by § 3:
"A credit given by a bank for an item drawn on or payable at
such bank shall be provisional, subject to revocation at or before
the end of the day on which the item is deposited in the event the
item is found not payable for any reason. Whenever a credit is
given for an item deposited after banking hours such right of
revocation may be exercised during the following business day."
Many cases are collected in Bogert, Failed Banks, Collection
Items and Trust Preferences, 29 Mich.Law Review 545, 551, 552.
For a collection of the cases, see
82 A.L.R. 97.
"Sec. 13. (1) When the drawee or payor, or any other agent
collecting bank shall fail or be closed for business by the state
bank commissioner or by action of the board of directors or by
other proper legal action, after an item shall be mailed or
otherwise entrusted to it for collection or payment but before the
actual collection or payment thereof, it shall be the duty of the
receiver or other official in charge of its assets to return such
item, if same is in his possession, to the forwarding or presenting
bank with reasonable diligence."
"* * * *"
"(3) Where an agent collecting bank other than the drawee or
payor shall fail or be closed for business as above, after having
received in any form the proceeds of an item or items entrusted to
it for collection, but without such item or items having been paid
or remitted for by it either in money or by an unconditional credit
given on its books or on the books of any other bank which has been
requested or accepted so as to constitute such failed collecting or
other bank debtor therefor, the assets of such agent collecting
bank which has failed or been closed for business as above shall be
impressed with a trust in favor of the owner or owners of such item
or items for the amount of such proceeds and such owner or owners
shall be entitled to a preferred claim upon such assets,
irrespective of whether the fund representing such item or items
can be traced and identified as part of such assets or has been
intermingled with or converted into other assets of such failed