20. When An Account Is Overdrawn

When a depositor has overdrawn his account, any deposit that he may afterward make, whether checks, notes, or the like, belongs absolutely to the bank, to the extent of the overdraft.1

21. The Bank As An Agent

It has been already stated that the relation between a bank and general depositor is that of debtor and creditor, but this may be changed into the relation of agent and principal. Of course, when a bank is acting as agent its act is that of its principal, and anything it may have, whether checks, money, bonds, and the like, belong to its principal. It is not an infrequent thing for a depositor to make use of a bank as an agent in collecting checks and in other matters. His object in doing so is to retain his exclusive control and ownership over the thing left with the custody of a bank. Thus suppose he wishes to retain control of a check that he has received from the maker. Instead of indorsing it in the usual manner in blank and giving it to the receiving teller, he indorses it "for collection." If he indorsed the check in blank, deposited it and was credited with the amount, the title would pass to the bank, and his control of it would be lost; consequently, if the first bank, or some other to which it had been sent by that bank for collection, failed having the check or the proceeds, he could not recover the whole amount, but only the same percentage as other creditors. To insure himself against such an event, he must indorse it "for collection," whereby he retains his ownership until the money is actually collected. A bank that receives a check thus indorsed is only an agent for the depositor, and every other bank through which it passes acts in the same capacity. In these cases, therefore, it is said, that a trust relation, and not that of debtor and creditor, exists between the depositor of the cheek and the bank in which it is deposited, and one peculiar effect of this relation is, the money thus collected for the principal belongs to him and can be claimed by him so long as he can clearly trace the amount as a fund separate from any other. If the money collected on a check thus indorsed is collected and mingled with other funds so that its identity is gone, then the principal must share like other creditors; if it is put in a separate place, or in any way can be identified as trust money belonging to a principal and not to the collecting bank, the fund can be recovered by the principal.1

1 See Chapter X, Section 30.

22. Attachment Of A Deposit By Depositor's Creditor

Lastly, every now and then a depositor is sued and his deposit is attached to secure the claims of his creditor who has sued him. If the depositor should come in and attempt to draw out his money, it would be the duty of the bank to keep it until the legal proceedings against him were ended.2 It would not be justified in giving to him his deposit on his representation that the claim is good for nothing, and that the court will surely decide against the claimant. The bank may have no reason to doubt his statement, yet it must keep the money subject to the order of the court.

1 This indorsement, however, has given rise to some consequences that are displeasing to banks. Thus, S received a draft for $8, drawn by a bank in Connecticut on the National Park bank of New York, which he raised to $1,800, indorsed in blank, and deposited in the Eldred bank of Pennsylvania. This bank, after indorsing the draft "for collection for account of the Eldred Bank," sent it to the Seaboard Bank of New York to be collected. It was presented through the clearing house and paid, and the Seaboard bank duly credited the amount in an account kept between itself and the Eldred bank, and the latter bank in due time paid the amount to the depositor of the check. About a month after the Park Bank paid the check the alteration was discovered and it sued the Seaboard Bank to recover the excess of payment. The court held that as it had paid over the amount before receiving any notice of the erroneous payment by the Park bank it was not liable. If, however, the Seaboard Bank had owned the check, a different rule would have been applied. As it was acting merely as an agent for another bank to which the money had been paid (or credited in account, which was the same thing), it could not be required to refund. This decision led the New York clearing house to adopt the rule that all members of the association should not send checks or other instruments containing a qualified or restrictive indorsement, such as "for collection," or "for account of," or words of similar import, unless all the indorsements thereon were guaranteed by the sending hank. Similar action was adopted by all the large clearing houses throughout the country. This case is reported in 114 N. Y. 28.

2 See Chapter XIX.