As already stated, in the settlement through the clearing house no account is taken of the fact that the checks may be bad, and the settlement of such checks or other items is effected directly between the drawee bank and the bank which presented the paper. Usually it is provided by the rules that checks which are found not good shall be returned by the banks receiving them to the banks from which they were received before a certain hour on the same day."

If a check is returned within the time fixed by the rule, this is, of course, equivalent to a refusal to pay. On the other hand, if a check is not returned within the time so fixed, it would naturally follow that the settlement would become operative as payment, with the same effect as if payment had been made in cash over the counter of the bank. In this view such payment would not prevent the drawee bank, in the absence of special circumstances, from recovering back the money if the payment had been made under a forged indorsement, or if the check had been altered;10 but it would prevent a recovery from a bona fide holder if the mistake of the drawee

The rule of the New York clearing house that such items shall be returned the same day to the bank from which they were received, which shall immediately refund, is not repealed by a later provision that in case of the failure of the bank to refund the other bank may report the fact to the manager of the clearing house, who shall, with the approval of the committee, readjust the clearing house statement, and declare the correct balance between such banks, provided the report be made before 1 o'clock the same day. The bank which has been charged with such paper may seek reclamation directly from the other bank. Mt. Morris Bank v. Twenty-Third Ward Bank, 172 N. Y. 244, 64 N. E. 810. See "Banks and Banking," Dec. Dig. (Key No.) §§ 319, 320; Cent. Dig. §§ 1225, 1226.

8 Fernandez v. Glynn, 1 Camp. 426, note; German Nat. Bank v. Farmers' Deposit Nat. Bank, 118 Pa. 294, 12 Atl. 303. See "Banks and Banking," Dec. Dig. (Key No.) § 320; Cent. Dig. § 1226.

9 Ante, p. 172.

10 Ante, p. 167. See Crocker-Woolworth Nat. Bank v. Nevada Bank, 139 Cal. 564, 73 Pac. 456, 63 L. R. A. 245, 96 Am. St. Rep. 169. See "Banks and Banking," Dec. Dig. (Key No.) § 320; Cent. Dig. §

had been in failing to discover that the signature of the drawer was forged,11 unless the holder was one who by bad faith or misconduct had contributed to the success of the fraud or to the mistake.12 Indeed, it has been held in Pennsylvania that a rule requiring checks "not good" to be returned before a designated hour applied only to checks not good because of the in- · sufficiency of the drawer's funds.13

In the view that if a check be not returned within the time limited the settlernent operates as payment, if the drawee bank failed to return within the time a check which was not good because of the insufficiency of the drawer's funds, no recovery on that ground could thereafter be had, even if the bank had failed to act under the mistaken belief that the funds were sufScient. This result logically follows, at least in those jurisdictions where it is held that, if the drawee bank pays a check in the mistaken belief that the drawer's funds are sufficient, it cannot afterwards correct the mistake and recover the amount from the payee upon the ground of a mistake of fact.14 In

11 Ante, p. 161; Commercial & Farmers' Nat. Bank of Baltimore v. First Nat. Bank of Baltimore, 30 Md. 11, 96 Am. Dec. 554; Dedham Nat. Bank v. Everett Nat. Bank, 177 Mass. 392, 59 N. E. 62, 83 Am. St. Rep. 286.

So held, though the payee bank was not injured by the delay, under a clearing house rule that checks not returned before 2 o'clock should be deemed to have been paid with like effect as though paid in currency at that hour over the counter of the bank on which it was cleared. National Bank of Commerce in St. Louis v. Mechanics' American Nat. Bank, 148 Mo. App. 1, 127 S. W. 429. See "Banks and Banking," Dec. Dig. (Key No.) § 320; Cent. Dig. § 1226.

12 National Bank of North America v. Bangs, 106 Mass. 441, 8 Am. Rep. 349. See "Banks and Banking," Dec. Dig. (Key No.) § 320; Cent. Dig. § 1226.

13 Tradesmen's Nat. Bank v. Third Nat. Bank, 66 Pa. 436; Corn Exchange Nat. Bank v. National Bank of Republic, 78 Pa. 233.

In these cases the drawer's signature was forged, and recovery by the drawee was allowed under a statute. See "Banks and Banking," Dec. Dig. (Key No.) § 320; Cent. Dig. § 1226.

14 Ante, p. 149.

The Chicago rule provided that checks "not found good are to be

Massachusetts and New York, however, it has been held that such a mistake may be corrected, although the check be not returned within the time limited, unless the bank which presented the check has changed its position before notice of the mistake, as by paying the amount over to an owner who had deposited the check for collection. The question in Massachusetts arose under the rules of the Boston clearing house which provided: "Whenever checks are sent through the clearing house which are not good, they shall be returned by the banks receiving the same, to the banks from which they were received, as soon as it shall be found that said checks are not good: and in no case shall they be retained after 1 o'clock." In a case where certain checks, having been discovered to be not good, were handed by the teller of the drawee bank at 12:45 p. m. to the messenger, with direction to return them and to collect the amounts from the banks from which they had been received, but owing to a mistake of the messenger as to the number of one of the checks he went to the wrong bank, in consequence of which the check was not returned to the proper bank until 1:07 p. m., it was held that the drawer bank could recover back the amount. The court said: "Under this arrangement, the payment must be regarded as only provisional until the hour of 1 o'clock, to become complete only in case the check is not returned at that time. And if by any mistake of fact the return of the check is not then made, then, returned the same day received, before 1:30 o'clock p. m., to the member from whom received, who shall immediately reimburse the holder of the same." At 1:42 p. m. the drawer discovered that the check was not good, and returned it at 2:15, and it was held that it could not recover back the amount. Preston v. Canadian Bank of Commerce (D. C.) 23 Fed. 179. See Blaffer v. Louisiana Nat. Bank, 35 La. Ann. 251. See, also, dissenting opinion of Ingraham, J., in Citizens' Central Nat. Bank v. New Amsterdam Nat. Bank, 128 App. Div. 554, 112 N. Y. Supp. 973. See "Banks and Banking," Dec. Dig. (Key No.) § 320; Cent. Dig. § 1226.

15

*

*

15 Merchants' Nat. Bank v. National Eagle Bank, 101 Mass. 281, 100 Am. Dec. 120. See "Banks and Banking," Dec. Dig. (Key No.) § 320; Cent. Dig. § 1226.

as between the two banks, it is to be treated as payment made under a mistake of fact, precisely to the same extent, and with the same right to reclaim, which would have existed if the payment had been made by the simple act of passing the money across the counter directly to the payee on presentation of the check. The manifest purpose of the provision is to fix a time at which the creditor bank may be authorized to treat the check as paid, and be able to regulate its relations to other parties." To this general statement no exception can be taken, but in its application it is submitted that there was error, for the court declared that money paid to the holder of a check drawn without funds may be recovered back, if paid by the drawee under a mistake of fact, and that if the plaintiff had paid the check at its counter under such a mistake of fact it could have maintained the action. And in a later Massachusetts case 16 the same rule was applied where the discovery of the mistake did not occur until after the hour for returning the check. "The rule," said the court, "authorizes the bank receiving the check. after 1 o'clock arrives and the check is not returned, to treat it in all transactions as if it were good. If, therefore, the bank changes its position, it will suffer no loss by reason of it. On the other hand, if the mistake is discovered after 1 o'clock, and the bank * * has not changed its position by reason of the expiration of the time, it should rectify the mistake when reasonable care has been exercised by the bank on which it was

16 Merchants' Nat. Bank v. National Bank, 139 Mass. 513, 2 N. E. 89.

Where the bank paid without examination of the drawer's account, this was not payment under a mistake of fact, but simply laches, and the bank could not recover. Boylston Nat. Bank v. Richardson, 101 Mass. 287.

If the drawee bank fails to return a check within the time limited, knowing that the drawer's account is not good, though in the expectation that it will be made good, this is not a mistake of fact entitling it to recover. Atlas Nat. Bank v. National Exch. Bank, 176 Mass. 300, 57 N. E. 606. See "Banks and Banking," Dec. Dig. (Key No.) § 320; Cent. Dig. § 1226.

drawn." The question in New York was presented under a rule which provided: "Return of checks, drafts, etc., for informality, not good, missent, guarantee of indorsements or for any other cause, should be made before 3 o'clock of the same day." Where the plaintiff returned by its messenger a check found not good, but the check did not reach the other bank until a few minutes after the hour, it was held, following the Massachusetts cases, that the plaintiff could recover.1

EFFECT OF RULES-NON-MEMBERS

48. The members of a clearing house association may make such rules, as between themselves, for the conduct of their business, as they see fit; but such rules do not affect the rights of those who are not members, unless they contract with reference to the rules.

The members of a clearing house association may make such rules, as between themselves, for the conduct of their business, as they see fit.18 Such rules can, in general, have no effect upon rights of outsiders.19 To the regulations of the associa

17 Citizens' Central Nat. Bank v. New Amsterdam Nat. Bank, 128 App. Div. 554, 112 N. Y. Supp. 973, affirmed 198 N. Y. 520, 92 N. E. 1080. See "Banks and Banking," Dec. Dig. (Key No.) § 320; Cent. Dig. § 1226.

18 Atlas Nat. Bank v. National Exch. Bank, 176 Mass. 300, 57 N. E. 605; O'Brien v. Grant, 146 N. Y. 163, 40 N. E. 871, 28 L. R. A. 361. The members may bind themselves by rules governing, as between themselves, the effect of their indorsements. Crocker-Woolworth Nat. Bank v. Nevada Bank, 139 Cal. 564, 73 Pac. 456, 63 L. R. A. 245, 96 Am. St. Rep. 169. See “Banks and Banking," Dec. Dig. (Key No.) § 319; Cent. Dig. § 1225.

19 See National Union Bank v. Earle (C. C.) 93 Fed. 330.

The rules do not affect the relations between the payee of a check presented through the clearing house and the drawee. People v. St. Nicholas Bank, 77 Hun, 159, 28 N. Y. Supp. 407.

Where a bank to which a draft had been indorsed "for collection"