18. A Bank Should Not Receive A Deposit When It Is Insolvent

Many of the states within a few years have passed laws forbidding banks to receive deposits when they are insolvent and making the offense a crime. When a bank has thus taken a deposit the depositor can recover the check or money. Some difficult questions though have arisen when banks that were insolvent did not know of their real condition and did not expect to suspend operations. Generally, in such cases, a depositor can not recover. In one case a depositor was credited with a check that was sent to another bank for collection and collected, and the amount was credited to the first or sending bank. The bank having failed, the depositor claimed that he ought to receive the full amount of his check, in effect, a preference over the other creditors, but the court decided otherwise. In order to recover, it is not enough usually to show that the bank was insolvent at the time it received deposits, but that it knew of its condition and did not intend to continue long in business. Fraud is essential to recovery; and it must, therefore, appear that the bank took the deposit knowing or expecting it would soon fail. The act then becomes a fraud, for no depositor under these circumstances would make a deposit in such an institution.

If a deposit, consisting of checks or other instruments which are credited as cash to the depositor, is made in a bank, with the right to draw immediately therefor, and the bank fails soon afterward and before their collection, can the depositor demand his checks or the proceeds if they have been collected, or must he share like the other creditors? By thus crediting the checks as cash, the bank becomes the owner, and if it makes advances thereon it has a lien for the amount, whether the bank fails or not. In no case can the depositor reclaim his checks until he has paid his indebtedness. Can he recover his checks at all? Does the bailee relation exist between the bank and the depositor? Does not the practice, whenever it exists, of crediting checks as cash, negative completely the intention or act of forming such a relation? This is the view held by many courts. The bank becomes the real owner, and any bank that receives them is justified in thus regarding the first bank as the owner, and in making an advance thereon assured that it may hold the proceeds of the checks to reimburse itself. On the other hand, it is just as certain that no depositor would continue to deposit checks, drafts, or any documents in a bank which he supposed to be insolvent. Its method of treating his deposit as cash would in no wise change his purpose to deposit elsewhere if he-knew of its real condition.1

19. Deposits Received From One Depositor Paid By Another

It is a daily practice tor depositors to give checks that are deposited by the payees in the-banks on which they are drawn, because they too keep their accounts in them. In such cases, of course, the: checks are paid by charging off the amounts from the makers'accounts and crediting the payees. Occasionally, however, a bank makes the unpleasant discovery, when entering the items on its books, that a depositor's balance is insufficient to pay the checks which have been credited to another depositor. Can they be charged back again? If the over draft is a mistake on the part of the maker of a check, and he makes another deposit to cover the deficit, there is no loss to any one; and this usually happens when one has checked out more money than he has in the bank; occasionally he fails, and then there is trouble. He can not deposit any more money, for he has none. If the bank can not charge back the excess of the depositor who was credited with the amount, it will be the loser. The creditor says to the bank: "You knew the condition of the maker's account, or ought to have known it, before paying his check. If you had looked at the books, you would, in fact, have seen that he had not money enough. If you did not take the trouble, or if you looked and made a mistake, you ought to suffer and not I, for if you had told me there was not money enough to pay it when I presented it for payment, or credit to my account, which is the same thing, I should have taken action instantly to collect the amount of my debtor." The creditor is regarded by the courts therefore as having the better case, and the bank must look to the maker of the check, or his assignee, if the maker has failed to make the amount good, or if this can not be done, to bear the loss.

1 See page 62, and chapter XIX, for a more extended presentation of the subject.