U.S. Supreme Court JENNINGS v. U.S. FIDELITY & GUARANTY CO., 294 U.S. 216 (1935)

[Page 294 U.S. 216, 221]

of a substitute. To preclude the extension of that ruling to collections through a clearing house the Bank, Collection Code makes provision in section 9 (Acts Ind. 1929, c. 164) 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 clearing house 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.

[Page 294 U.S. 216, 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 clearing house.

One other section of the Bank Collection Code is still to be considered. This is section 13 (Acts Ind. 1929, c. 164), 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. 216, 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. (C.C. A.) 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.' Section 13. 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. Rev. St. 5236, 12 U.S.C. 194 (12 USCA 194); Davis v. Elmira Savings Bank, 161 U.S. 275, 283, 284 S., 16 S.Ct. 502; Easton v. Iowa, 188 U.S. 220, 229, 23 S.Ct. 288; Cook County National Bank v. United States, , 2 S.Ct. 561; Texas & Pacific R. Co. v. Pottorff, 291 U.S. 245, 54 S.Ct. 416; 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.

It is so ordered. Footnotes

Footnote 1 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.

Footnote 2 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.

Footnote 3 Section 9. '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 section 3 (Acts Ind. 1929, c. 164): '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.'

Footnote 4 Many cases are collected in Bogert, Failed Banks, Collection Items and Trust Preferences, 29 Mich. Law Review 545, 551, 552.

Footnote 5 For a collection of the cases, see 82 A.L.R. 97.

Footnote 6 '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 bank.'