Source: https://caselaw.findlaw.com/us-supreme-court/271/489.html
Timestamp: 2019-04-25 00:57:47+00:00

Document:
Messrs. Harry E. Pickett and C. T. Knapp, both of Douglas, Ariz ., for plaintiff in error.
The county of Cochise, Arizona, on December 22, 1920, drew its check on the Central Bank of Willcox, Ariz., in favor of plaintiff in error, hereafter called plaintiff. Plaintiff delivered the check indorsed in blank to the First National Bank of Douglas, Ariz., 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 collection.
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 Judicial [271 U.S. 489, 491] Code, 241; Id. 128 (Comp. St. 1218, 1120); Id. 24, First (a) being section 991, Comp. St.; Sowell v. Federal Reserve Bank, 268 U.S. 449 , 45 S. Ct. 528. 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 negligence.
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 , 5 S. Ct. 141. And see Federal Reserve Bank v. Malloy, 264 U.S. 160, 164 , 44 S. Ct. 296, 31 A. L. R. 1261, 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, 164 (44 S. Ct. 296). Compare Bank of Washington v. Triplett, 1 Pet. 25, where the undertaking of the initial bank was to transmit paper for collection.
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, supra. 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 paper.
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 States, supra; [271 U.S. 489, 494] Brusegaard v. Ueland, 72 Minn. 283, 75 N. W. 228; Nat. Bank of Commerce v. Bossemeyer, 101 Neb. 96, 102, 162 N. W. 503, L. R. A. 1917E, 374; Walker & Brock v. Ranlett Co., 89 Vt. 71, 93 A. 1054; Aebi v. Bank of Evansville, 124 Wis. 73, 102 N. W. 329, 68 L. R. A. 964, 109 Am. St. Rep. 925. See Scott v. McIntyre Co., 93 Kan. 508, 144 P. 1002 L. R. A. 1915D, 139; Vickers v. Machinery Warehouse & Sales Co., 111 Wash. 576, 191 P. 869. But see Implement Co. v. Bank, 128 Tenn. 320, 160 S. W. 848; Packing Co. v. Davis, 118 N. C. 548, 24 S. E. 365.
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 diligence.

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