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 the debtor makes payment to his creditor in genuine bank-notes which are, however, worthless, usually because of the insolvency of the bank issuing them, where neither debtor nor creditor know of the insolvency of the bank, a conflict of authority as to the validity of such payment exists. The weight of authority holds that such payment is a nullity, if made after the bank has stopped payment,1 provided the creditor gives reasonable notice to the debtor of the fact that such notes are worthless.2 A strong minority of the courts, however, hold that such a payment is valid, and that the loss must fall upon the creditor.3 If the debtor knows that the bank is insolvent and the creditor is ignorant of such fact, the loss must fall on the debtor, and the payment is in legal effect a nullity.4
9 Wormser v. Marroquin, 249 Fed. 428; Rasst v. Morris, 133 Md. 187, 108 Atl. 787.
10 Rasst v. Morris, 133 Md. 187, 108 Atl. 787.
11 Rasst v. Morris, 133 Md. 187, 108 Atl. 787.
12 San Juan v. St. John's Gas Co., 195 U. S. 510, 49 L. ed. 299.
13 San Juan v. St. John's Gas Co., 195 U. S. 510, 49 L. ed. 299.
14 Succession of Serralles v. Esbri, 200 U. S. 103, 50 L. ed. 391.
1 Frontier Bank v. Morse, 22 Me. 88, 38 Am. Dec. 284; Ontario Bank v.
Lightbody, 13 Wend. (N. Y.) 101, 27 Am. Dec. 179 [affirming, Lightbody v. Bank, 11 Wend. (N. Y.) 9]; Westfall v. Braley, 10 O. S. 188, 75 Am. Dec 509; Wainwright v. Webster, 11 Vt. 576, 34 Am. Dec. 707; Townsends v. Bank, 7 Wis. 185.
"So long as they (bank-notes) are in fact what they purport to be, payable on demand, common consent gives them the ordinary attributes of money. But upon the failure of the bank by which they were issued, when its doors are closed, and its inability to redeem its bills is openly avowed, they instantly lose the character of money, their circulation as currency ceases with the usage and consent upon which it rested and the notes become the mere dishonored and depreciated evidence of debt. When this change in their character takes place, the loss must necessarily fall upon him who is the owner of them at the time; and this, too, whether he is aware or unaware of the fact. His ignorance of the fact can give him no right to throw the loss which he has already incurred upon an innocent third party." West fall v. Braley, 10 O. S. 188, 75 Am. Dec. 500.