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(264 U. S. 160, 68 L. ed., Adv. Ops. p. 288, 44 Sup. Ct. Rep. 296.)

The

ment of the draft from the cashier of the Lumber Bridge bank. 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 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 Brothers, against the Richmond bank? and

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 Brothers 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

31 A.L.R.-80.

Banks-liability

responsible to him for their defaults. This court, in Exchange Nat. Bank v. Third Nat. Bank, 112 U. S. 276, 28 L. ed. 722, 5 Sup. Ct. Rep. 141, 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. 289. Here the relations of the payee to the initial bank of deposit are controlled by the Florida statute with re- of collecting spect to which it bank to depositor. 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 intrust 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. 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 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 -duty of collectbut "that which the

ing agent.

law declares to be a legal tender, or which is by common consent considered and treated as money and passes as such at par." Ward v. Smith, 7 Wall. 447, 452, 19 L. ed. 207, 210. 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 sur- liability for renders the paper, accepting worthit is responsible to the owner for any resulting loss. Fifth Nat. Bank v. Ashworth, 123

less draft.

Pa. 212, 218, 2 L.R.A. 491, 16 Atl. 596; Hazlett v. Commercial Nat. Bank, 132 Pa. 118, 125, 19 Atl. 55; National Bank v. American Exch. Bank, 151 Mo. 320, 329, 74 Am. St. Rep. 527, 52 S. W. 265; Essex County Nat. Bank v. Bank of Montreal, 7 Biss. 193, Fed. Cas. No. 4,532; Noble v. Doughten, 72 Kan. 336, 351-353, 3 L.R.A. (N.S.) 1167, 83 Pac. 1048; Anderson v. Gill, 79 Md. 312, 317, 25 L.R.A. 200, 47 Am. St. Rep. 402, 29 Atl. 527; Bank of Antigo v. Union Trust Co. 149 Ill. 343, 351, 23 L.R.A. 611, 36 N. E. 1029. It is unnecessary to cite other decisions, since they are all practically uniform. Anderson v. Gill, 79 Md. 317, 25 L.R.A. 200, 47 Am. St. Rep. 402, 29 Atl. 527, presented a situation practically the same as that 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 & Bkg. 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 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. & T. Co. 93 U. S. 379, 23 L. ed. 920), did make demand, it was only authorized to receive money (Ward v. Smith, 7 Wall. 451, 19 L. ed. 209); 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

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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 Brothers. 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 to send checks for collection to bank 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

Banks-effect of regulation relieving from liability.

(264 U. S. 160, 68 L. ed. —, Adv. Ops. p. 288, 44 Sup. Ct. Rep. 296.)

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 Nat. Bank v. Missouri, 263 U. S. 640, 68 L. ed. —, Adv. Ops. p. 235, 44 Sup. Ct. Rep. 213, decided January 28, 1924. 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 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

-effect of right to send checks to drawee.

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 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 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, or by a shipment of currency," the 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 cur

rency, 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.

-how far bound.

But the proof shows that the alleged custom was not known to plaintiffs; and they could not be held to it without Custom-as to such knowledge, be- bank collections cause, 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 2 pence in lieu of tithes is good; but to pay sometimes 2 pence, and sometimes 3 pence, as the occupier of the land pleases, is bad for uncertainty." 1 Bl. Com. 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. Oelricks v. Ford, 23 How. 49, 62, 16 L. ed. 534, 538; Kalamazoo Corset Co. v. Simon, 129 Fed. 144, 146; Chicago, M. & St. P. R. Co. v. Lindeman, 75 C. C. A. 18, 143 Fed. 946, 949, 20 Am. Neg. Rep. 243; Foley v. Mason, 6 Md. 37, 50; Wilson v. Willes, 7 East, 121, 127, 103 Eng. Reprint, 46, 3 Smith, 167, 8 Eng. Rul. Cas. 311, 8 Revised Rep. 604. 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 im- performanceplication that the

-alternative method of

effect.

person sought to be bound by it had in mind one mode rather than the other.

(264 U. S. 160, 68 L. ed. —, Adv. Ops. p. 288,. 44 Sup. Ct. Rep. 296.)

It is said, however, that there is a custom among banks to settle among themselves by means of drafts, so well 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 intrusted 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, 390-394, 19 L. ed. 987,
989-991. Decisions upon that ques-
tion are in great confusion. But
whatever may be the doctrine in
other respects, certainly a custom
relied upon to take
-to supplant
the place of a settled rule of law-
principle of law,

definiteness.

and therefore to have the force of
law, ought to be as definite and spe-
cific in negativing the principle as
the law which it assumes to sup-
plant is in affirming it.
Judgment affirmed.

ANNOTATION.

Federal reserve banks and bank collections.

The cases on this question are collected and discussed in annotation in 30 A.L.R. 635.

An important contribution to the law on this subject is made by the decision of the Federal Supreme Court in the reported case (FEDERAL RESERVE BANK v. MALLOY, ante, 1261), where a Federal reserve bank was held not justified in accepting a draft instead of cash in the collection of a check, and was held liable to the payee of the check where the draft was dishonored. The court held that no custom was shown justifying the acceptance of the drawee's own draft in

stead of money, and that such method of collection was not warranted by a regulation of the Federal reserve banks that they would assume no liability in collections except for negligence, and that Federal reserve banks were authorized to send checks for collection directly to the drawee. For holdings of the lower Federal courts in this case, see the annotation in 30 A.L.R., on pp. 650, 651.

No other case appears to have passed on the present question since the preparation of the earlier annotation on this subject. R. E. H.

STANDARD PRINTING & PUBLISHING COMPANY

V.

JAMES C. BOTHWELL et al., Receivers, Appts.

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(143 Md. 303, 122 Atl. 195.)

Set-off of insurance loss on premium note.

1. A claimant under a strike insurance policy cannot set off his claim upon an assessment against his premium note, where the claims against the insurer exceed the aggregate of the assessments, while other policy

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