Story Case

On July 1, 1915, the Hamilton Equipment Corporation had a balance of deposit with the Fort Dearborn National Bank, amounting to $875. On that day a note matured, in favor of the bank, for $400. The company failed to meet this obligation. Another matured on July 5,1915, for $500. On July 3, the bank received a check, issued against the deposit by the equipment company, for $450. It dishonored this check with the statement, "not sufficient funds," intending to hold a lien on the entire balance for the $400 due, and for $500 falling due on July 5. Subsequently, the Hamilton Equipment Company brought suit against the bank for failure to honor its check. Has the bank a defense?

Ruling Court Case. Armstrong Vs. Chemical National Bank, Volume 41 Federal Reports, United States, Page 234

The Fidelity National Bank of Cincinnati, was pressed for money by a run of its depositors. In order to meet the withdrawals, it transmitted to the Chemical National Bank of New York, securities consisting of notes, drafts, and bills of exchange, to the amount of $1,000,000, according to the face value. This occurred on June 14. The Fidelity National Bank had, during the previous March, borrowed $300,000 from the Chemical National Bank, and this sum was still due. Unknown to the Chemical bank, the bank at Cincinnati was embarrassed on June 14, and was officially declared insolvent on June 21. Armstrong was appointed the receiver. The Chemical bank now wishes to retain sufficient of the securities received on June 14 to cover all the Fidelity bank's indebtedness to it. The Chemical bank claimed a lien to this effect. Thereupon, Armstrong brought this action to compel the surrender of the securities upon payment of $313,000 borrowed on June 14.

Mr. Justice Wallace delivered the opinion: "A banker has a lien upon all funds and securities in his possession, deposited in the usual course of business by the customer, to facilitate the transactions between them. The lien arises from an implied understanding of the parties, but the lien does not exist when the securities have been deposited for a special purpose, or for the payment of a particular loan. Where they are delivered specifically to protect the bank in a particular transaction, or series of transactions, the banker has no lien upon them for any other purpose, and cannot assert one for any other indebtedness, whether arising from a general account or otherwise. Therefore, in this case, the Chemical bank had a lien on the securities, only for the amount advanced June 14, on faith of these securities. The Chemical bank must, therefore, account to Armstrong for the balance of the securities. The decree is for Armstrong to this extent."

Ruling Law. Story Case Answer

A bank may have two kinds of liens; one on its own stock for indebtedness due to it by the owner of the stock, and one upon deposits for indebtedness due by the depositor. A bank has no lien upon the stock of its stockholders by Common Law. Its charter may stipulate that a share holder may not have the right to sell his stock while indebted to the bank, and if he sells it, the buyer acquires only an interest to whatever may be left after discharging the stockholder's indebtedness to the bank. A bank may also create such a lien upon its stock by the provisions of a by-law, but this will not be binding upon purchasers of the stock who are ignorant of the existence of this by-law. If the charter or by-law gives a lien, or this is done by a statute in the state, the lien covers merely the stockholder's indebtedness to the bank. It does not cover his indebtedness to a third person acquired by the bank. The lien, of course, does not attach to stock held in trust.

At Common Law, a bank has a lien, based upon mercantile custom, on all moneys and securities of a depositor for his indebtedness to the bank. Like all other liens, however, a banker's lien does not exist if the transaction shows the intention of the parties to be inconsistent therewith. The Ruling Court Case shows that if a deposit is made for a specific purpose, it is not the intention of the parties that the bank shall have a lien for the general balance of the depositor's account. If the deposit has not been made for a specific purpose, the bank may apply it on an obligation falling due, although there are checks outstanding against the deposit in favor of third persons. The bank has the right at any time during the day, at a note's maturity, to apply the funds in its hands belonging to the maker, to the payment of the note. It cannot, however, hold a lien on the funds for amounts falling due in the future, although that time be but a few days away. Therefore, in the Story Case, the bank had no excuse for dishonoring the check. It could have applied $400 on the note past due, but it could not retain the balance, amounting to $475, as a lien for the note falling due on July 5.