This section is from the book "The Law Of Contracts", by William Herbert Page. Also available from Amazon: Commercial Contracts: A Practical Guide to Deals, Contracts, Agreements and Promises.
If a bank pays a check which overdraws a depositor's account, some authorities hold that the bank cannot recover from payee if he does not know that such check will make an overdraft. The reasons given for such holding are different in different jurisdictions. In some recovery is denied because the bank is chargeable with knowledge of the amount of depositors' funds in its hands.1 " The bank always has the means of knowing the state of the account of the drawer, and if it elects to pay the paper, it voluntarily takes upon itself the risk of securing it out of the drawer's account or otherwise. If there has ever been any doubt upon this point there should be none hereafter ;"2 in others because the mistake is as to a collateral matter.3 Under this rule, where A gave B a check on a bank which B deposited in the same bank, receiving credit therefor on his pass-book, the bank cannot on the same day return the check and cancel the credit to B because A's account was overdrawn.4 Such a deposit is treated as a payment. Accordingly where a different theory obtains and such a deposit is held to be for collection only, not amounting to a payment by the bank of the check thus deposited, the bank may erase the credit given for a check on discovering that the drawer has no funds.5 In Massachusetts a payment of a check without the bank's examining the drawer's account, which had not been reduced during the preceding month, was held to be made with such negligence as to preclude recovery.6 Under different circumstances a recovery has been allowed. B, an agent of a bank, Y, sold goods which had been pledged to Y, and put the proceeds in the bank, Y, in his own name. B then drew a check payable to A upon the bank Y. A deposited this in the bank X, and X paid it to Y. Under the rules of the clearing house, checks which were not good could be returned if not retained after one P. M.
8Espy v. Bank, 18 Wall. (U.S.) 614; Parke v. Roser, 67 Ind. 500; 33 Am. Rep. 102; National Bank v. Bank, 122 N. Y. 367; 25 N. E. 355.
9 First National Bank v. Bank, 152 111. 296; 43 Am. St. Rep. 247; 26 L. R. A. 289; 38 N. E. 739; affirming 40 111. App. 640; First National Bank v. Bank, 4 Ind. App. 355; 51 Am. St. Rep. 221; 30 N. E. 808; First National Bank v. Bank, 182 Mass. 130; 94 Am. St. Rep. 637; 65 N. E. 24; Carpenter v. Bank, 123 Mass. 66; National Bank v. Bangs, 106 Mass. 441; 8 Am.
Rep. 349; Hensel v. Ry., 37 Minn. 87; 33 N. W. 329; First National Bank v. Bank, 56 Neb. 149; 76 N. W. 430; Shaffer v. MeKee, 19 O. S. 526; Rouvant v. Bank, 63 Tex. 610.
10 Land Title and Trust Co. v. Bank, 196 Pa. St. 230; 79 Am. St. Rep. 717; 50 L. R. A. 75; 46 Atl. 420.
11 Crocker -Wool worth National Bank v. Bank, 139 Cal. 564; 96 Am. St. Rep. 169; 63 L. R. A. 245; 73 Pac. 456.
12 Land, etc., Co. v. Bank, 196 Pa. St. 230; 79 Am. St. Rep. 717; 50 L. R. A. 75; 46 Atl. 420.
1 Manufacturers' National Bank v. Swift, 70 Md. 515; 14 Am. St. Rep. 381; 17 Atl. 336; Oddie v. Bank, 45 N. Y. 735; 6 Am. Rep. 160.
2 Oddie v. Bank, 45 N. Y. 735, 742; 6 Am. Rep. 160. In Merchants' National Bank v. Swift, supra, the depositor's account proved insufficient because a deposit made by him and put to his credit was of trust funds which he could not retain, and the facts of such deposit were all known to the bank.
3 Chambers v. Miller, 13 C. B. N. S. 125.
4 Oddie v. Bank, 45 N. Y. 735; 6 Am. Rep. 160.
5 National, etc., Co. v. McDonald, 51 Cal. 64; 21 Am. Rep. 697.
6 Boylston National Bank v. Richardson, 101 Mass. 287.
Before the bank X had paid B, but after it had given B credit for the amount of this check upon his book, Y demanded repayment of this amount from X. On X's refusal Y sued. It was held that Y could recover the amount of such check less the amount of B's deposit in the bank actually belonging to B.7 If the payee knows that the check makes an overdraft and the bank pays in ignorance of such fact, the bank has been allowed to recover from the payee.8