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I therefore hold and adjudge that the under the clearing house rules, the presenting trustee is vested by operation of law with banks are bound, on demand, to accept their
return. the title to all ten of the policies in question, for the purpose of securing their cash sur 4. Banks and banking 319_Clearing house render value and loan value, to be applied
rules may be waived. to the debts of the bankrupt; and it is so
The rules made by the members of a clear
ing house for their mutual convenience and proordered.
tection may be waived by the bank which they
rules may have a bearing on rights of outside In re SMITH, LOCKHART & co. partjes.
While the rules of a clearing house are not TRUSTEE IN BANKRUPTCY v. MERCAN
of their own force binding on persons not memTILE TRUST & DEPOSIT CO.
bers, such rules and the practice under them (District Court, D. Maryland. December 17,
may have a bearing on rights of third persons. 1924.)
In Bankruptcy. In the Matter of Smith, 1. Banks and banking 142-Bankruptcy Lockhart & Co., bankrupt. Petition of the
trustee held not entitled to recover fund which had legally vested in another before
trustee in bankruptcy against the Mercanbankruptcy.
tile Trust & Deposit Company for an acWhere a bank received and credited to a counting Credits of accounting bank dedepositor a check given by another depositor termined. which had funds sufficient to pay it, and which, so far as the bank knew, was solvent, though J. Purdon Wright and Neu
J. Purdon Wright and Reuben Oppenin fact insolvent, the transaction between the heimer, both of Baltimore, Md., for trustee. parties was completed and the bank was re- Venable, Baetjer & Howard, of Baltiquired to apply so much of the drawer's funds
more, Md., for Mercantile Trust & Deposit as necessary to the payment of the check, and the fact that it failed to do so does not entitle the trustee of the drawer, on its subsequent bankruptcy, to claim the fund.
ROSE, Circuit Judge. Adjudication in 2. Banks and banking 320–Bank held to bankruptcy of the stock brokerage firm of have made illegal disbursement of funds of Smith, Lockhart & Co., herein called the bankrupt estate.
bankrupt, was made upon a petition filed at On the day of bankruptcy but before the 12:30 in the afternoon of August 9, 1922. filing of the petition and without knowledge of .its insolvency, the bank in which bankrupt was Subsequent investigation demonstrated that a depositor received checks given by it through its insolvency was of long standing, but bethe clearing house and charged the same to its fore the day upon which legal proceedings account. By the clearing house rules it had . were instituted that fact does not appear the right to return the checks at any time before 12 o'clock, and by custom the time limit to have been known to any one outside the might be waived and return permitted up to the bankrupt's offices. It banked with the Mertime of closing of the exchange for the day. cantile Trust Company, hereinafter styled Learning of bankrupt's embarrassment and the Mercantile. It is not claimed that at fearing that it might not have sufficient funds of bankrupt because of uncollected checks de- any time prior to the day on posited, the bank sought and received permis- tition in bankruptcy was filed the Mercansion to return the checks and duly credited tile questioned the financial soundness of them to bankrupt's account. This was after 12 its mus o'clock and after filing of the petition. Later,
12 its customer. finding that it had sufficient funds, the bank re
: At the close of business on August 8th, funded the amount of the checks to the pre- the books of the Mercantile indicated that senting banks. Held, that the waiver of the it held on deposit $55,750.94 of the banktime limit by the presenting banks and acceptance of return of the checks put the parties in
· rupt's money. On the morning of the 9th,
un the same position as when the checks were first Jos. F. Hooper « CO., another custos
St. Jos. P. Hooper & Co., another customer of presented; that the bank was not legally bound the Mercantile, deposited with it a check of to make the refund and was without right to the bankrupt's and in favor of the deposido so from funds which then belonged to the tor for $9.084.46. This amount was entered bankrupt estate.
in the Hooper passbook as cash and was at 3. Banks and banking Om 320—Time of pay- once credited to its account on the Mercanment of checks presented through clearing tilna i
clearing tile's ledger. The Mercantile over its counhouse. In contemplation of law, payment of checks
ter cashed a check of the bankrupt's for presented through a clearing house has not been $500 in favor of one not connected with made until expiration of the time within which, this controversy. In the usual course of
3 F.(20) 444 business, there had that morning been pre- At that time the rule of the clearing sented through the clearing house, to the house permitted a member bank to return Mercantile, more than a score of checks of a check charged to it at the morning clearthe bankrupt's aggregating $20,078.17. In ing before noon on that day and provided accordance with custom, all these were at that upon request made before 12, the time once duly charged by the Mercantile to the for return should be extended to 1. Inbankrupt's account. The aggregate of the structions were given to some of the MerHooper check, the check cashed over the cantile's employees to use the telephone to counter, and these clearing house checks secure an extension to that hour. These was $29,662.63, and the bankrupt's appar- instructions were misunderstood and were ent balance with the Mercantile was thus not acted upon. Counsel further advised reduced to $26,087.81.
that the check of the bankrupt which had Up to this time the Mercantile had no been credited to the Hooper Company hint that the bankrupt's business was not should be charged back to the latter. going on as usual, although, unknown to it. It was well after 12, and perhaps as late much had happened. At or shortly before as 1, before he heard that nothing had been 9 o'clock that morning, representatives of done with reference to the return of the the New York Stock Exchange presented checks of the bankrupt which that morning themselves at the bankrupt's office, and un- had come from the clearing house. In spite der orders of the Exchange removed the of the clearing house rule which in terms stock ticker therefrom. This was done be- limited the right of return to 12, or to 1, fore the senior members of the bankrupt when the extension had been seasonably refirm reached their place of business. So quested, it is in evidence that the member soon as they learned what had taken place, banks were usually willing to waive its they went to the office of their lawyer and strict application and to accept return at after a conference with him, they, about any time before the close of business hours 11:30, caused the Mercantile to be tele- for the day. When a check is returned, eiphoned that the ticker had been taken out ther within or after the time fixed by the and not to pay out any more money than rules, it is the practice of the returning they had in the account or more than they bank to attach to it a slip explaining the had collected, or words to the same general reason why it has been sent back. Such effect. The Mercantile thereupon sum- slips have printed upon them some 16 or 17 moned its counsel. He responded immedi- of the reasons for return most frequently ocately and reached the Mercantile at 11:40. curring in practice. The one relied upon He was told what his client knew. He nat- in the particular case is indicated by checkurally assumed that the bankrupt might be ing. Two of these reasons which appear in on the verge of failure and busied himself juxtaposition near the end of the slip are, to find out how it stood with his client. Be- “Drawn against uncollected funds," and, fore 12 o'clock he learned that while the “Not sufficient funds according to our apparent credit balance of the bankrupt books." By some error or misunderstandwith the Mercantile exceeded $26,000, that ing, the Mercantile checked the second of would be true only if the checks deposited these on the slip it sent out with the return by the bankrupt and provisionally accepted checks. That was not an accurate stateby the Mercantile as cash were honored. ment, for, as already stated, there were sufWithout concerning himself as to the possi- ficient funds on the face of the Mercantile's bility that payment might be stopped upon ledgers to meet all these checks. The Mera number of checks on out of town points cantile could have appropriately stated that for comparatively small amounts, as in fact
in fact the checks had been "drawn against uncolproved to be the case as to some of them, lected fund
me of them lected funds." It is true that by the time he and the Mercantile concentrated their the checks were sent back the funds had attention on two checks amounting in the been collected, but that fact was not then aggregate to $43.500, which had been cred- known to the Mercantile, in spite of the efited to the bankrupt. There were some spe- forts that it had been making to obtain incial reasons to fear that one or both of formation on that very point. Whether a these might not be paid. If neither of depositor's account is sufficient to meet a them was, the account of the bankrupt with check drawn by him against it often dethe Mercantile would have been overdrawn pends upon whether some checks or drafts by more than $17,000.
he has deposited have been or will be paid.
The bank which has his account may fre- The legally unsustainable attempt of the quently be unwilling to honor his check un- Mercantile to charge back the amonnt of til it knows whether the payment has been the check to the Hooper Company cannot made or not. In view of the frequency with help the trustee. The trustee did not which in practice returns must be made up- change his position because the Mercantile on this ground and that there is among the tried to alter its. Disappointed hopes are many reasons printed on the slip none more not in themselves sufficient to support an appropriate than the one, “drawn against estoppel. The amount of the bankrupt's uncollected funds," it would appear that check presented by the Hooper Company is in the understanding of the banks it covers a valid credit as against the trustee's claim such a case as that with which we are con- upon the Mercantile. cerned. Considerations of space dictate  The answer to the question as to that on the blanks as few words as possible whether the Mercantile is entitled to charge should be used, and therefore the reasons against the bankrupt's account the amount are often indicated rather than fully stated. it paid to the various clearing house banks,
The Mercantile's request to accept the re. after it knew of the appointment of the return was acceded to by all but one bank, ceiver, depends upon other considerations. the National Union, which refused to take The petition in bankruptcy was not filed back two checks for an aggregate of $7,705.- until after the hour at which, according to 27. The total amount returned by the other the literal wording of the clearing house banks to the Mercantile footed up $12,- rule, the Mercantile's right to return the 372.90. On subsequent days, and after the checks had expired. It is therefore not necMercantile knew of the proceedings in bank- essary to consider whether the Mercantile, ruptcy and the appointment of a receiver had it learned before 12 o'clock that a petifor the bankrupt, it repaid this sum to the tion in bankruptcy had been filed, would various banks which after 1 o'clock had ac- have owed the bankrupt estate a duty to cepted the return of the clearing house exercise reasonable diligence to return the checks. In these proceedings the trustee in checks. bankruptcy seeks to hold the Mercantile for  On the other hand, the Mercantile the Hooper check of $9,084.46 and for the does not claim that, after it knew the court $12,372.90 thus paid out by it after it knew in bankruptcy had taken charge of the esof the appointment of the receiver by the tate of the bankrupt, it had any right to court in bankruptcy.
use the funds of the latter in its possession  In the Hooper passbook, there was to pay claims of third parties. In short, it a general warning given by the Mercantile admits that if it had not before the appoint to its customers that it would not be "bound ment of the receiver paid the checks in conto use more than ordinary diligence to make troversy or made itself personally liable for collection of any item left with it for col- that payment, it cannot charge against the lection or by it passed to the credit of any funds of the bankrupt the payments it customer, . . • 'and in case of loss in made after it had knowledge of the appointany item for failure to collect... the ment of the receiver. It does, however, contrust company shall be entitled to charge tend that under clearing house rules it had such loss back to its customer or to collect once paid the checks. It is true that it did the same from the customer at once." But secure their refund from the banks which there was no failure to collect. The Mer- held them, but it argues that they made such cantile had in hands funds of the bankrupt refunds in reliance upon its inaccurate repsufficient to pay the check when it was pre- resentations, and that consequently they had sented, and due diligence required it to ap- the right to demand that it should return ply a sufficient portion of them to its pay- the money and that they did. The Mercanment. At that time it did not know, or sus- tile calls attention to the holding of Judge pect, that the bankrupt was embarrassed. Dallas that, under circumstances similar to The transaction as between it and the Hoop- those with which we are here concerned, the er Company was closed when it credited checks had been finally paid when the bank the amount of the check to the latter sub- upon which they were drawn received them ject to its right to call for a refund if it from the clearing house and charged them should subsequently turn out that it had to its customer, and it made no difference, been mistaken, as it was not, in supposing so far as the trustee was concerned, that that at the time it had in hand moneys of under the rules of the clearing house the the bankrupt adequate to the payment. Mercantile until 12 o'clock had the absoluto
3 F.(201) 444 right to return the checks to the banks which thing is what the members do, rather than had presented them. National Union Bank what they say they expect to do. There is no v. Earle (C. C.) 93 F. 330. It, however, dispute that, both by the rules and by the concedes that the great weight of authority course of business under them, a check preis that, in contemplation of law, payment sented through the clearing house is not conhas not been made until after the expirationsidered paid until after 12 o'clock. Up to of the time within which the presenting that time, the bank upon which it is drawn banks were bound upon demand to accept has so far as the presenting bank is conthe return of the checks. Henry Hentz v. cerned the absolute right to return it. It is National City Bank, 159 App. Div. 743, legally immaterial what its reasons for so 144 N. Y. S. 979; Stuyvesant Bank v. Na- doing may be, and it therefore makes no diftional Mechanics' Banking Association, 7 ference that it assigned a reason which had Lans. (N. Y.) 197; Merchants' National no foundation in fact. Sneider v. Bank of Bank v. National Bank of Commonwealth, Italy, supra. 139 Mass. 513, 2 N. E. 89; Columbia As the rules may be waived, it would Knickerbocker Trust Co. v. Miller, 215 N. seem to be equally clear that in the absence Y. 191, 109 N. E. 179, Ann. Cas. 1917A, of some misrepresentation or concealment 348; Sneider v. Bank of Italy, 184 Cal. having the effect of misrepresentation, a re595, 194 P. 1021, 12 A. L. R. 993; East- fund actually made by the presenting bank man Kodak Co. y. National Park Bank (D. in compliance with a request made after 12 C.) 231 F. 321, affirmed by the Circuit o'clock would put each of the two banks in Court of Appeals for the Second Circuit, the position in which it was when the check 247 F. 1002, 159 C. C. A. 662; National was first presented. Up to this point, I do Bank of Baltimore v. Drovers' & Mechan- not understand there is any serious differics' National Bank, 143 Md. 168, 122 A. ence between the parties either as to the 12, 30 A. L. R. 1019. .
law or as to the facts. The issue as joined [4, 5] It is well settled that the rules between them is upon the contention of the made by members of the clearing house for Mercantile that it was entitled to pay out their mutual convenience and protection the money it did and when it did, because may be waived by the bank which they aim the waiver of the presenting banks was made to protect. National Bank of Baltimore v. in reliance upon an untrue statement it made Drovers' & Mechanics' National Bank, su- to them. It does not say that it intended to pra, and they are not of their own force deceive anybody, nor is there the slightest binding upon persons not members of the reason to suppose that it did. Even were the clearing house. National Exchange Bank fact otherwise, the ordinary rule that nobody v. Ginn & Co., 114 Md. 181, 78 A. 1026, may base a recovery upon his own fraudu33 L. R. A. (N. S.) 963, Ann. Cas. 1914C, lent acts would scarcely apply. If at 12 508; Merchants' National Bank v. National o'clock on the day in question the silence of Bank of Commonwealth. supra: Overman the Mercantile had given the presenting v. Hoboken City Bank, 30 N. J. Law, 61; banks the absolute right to treat the checks Stuyvesant Bank v. National Mechanics as paid and no attempt to return had thereBanking Association, supra. The latter doc- after been made, the bankrupt estate would trine, however, does not imply that such be bound by such payments, made as they rules or the practice under them may not were by the Mercantile in the ordinary have a bearing even where other parties are course of business upon the orders of the involved. In many such cases the result de- bankrupt as evidenced by the checks and pends upon the time at which the check was without the Mercantile's having any reason paid, and that in its turn is often fixed by to believe that they should not be honored. the mutual understanding of the bank which It is true, as is already pointed out, the is said to have made the payment and the presenting banks might, if they had chosen, bank to which it has been made. To find have accepted a return of the checks and out what that understanding was, it is fre- refunded the money received for them, and quently necessary to look to the established if the decision to do so was not the result usage of business between them of which of some misrepresentation, concealment, or the rules for the government of their con mutual mistake, the refunds would be bindduct, which they had united to make, willing upon the banks making them and would usually be persuasive evidence, though they in effect inure to the benefit of the bankwill not always be conclusive. So far as rupt estate. On the other hand, if the preconcerns outsiders, at least, the decisive senting bank made the refund under circum
stances which justified it in saying that its that we do not have it.” Upon the evidence action was not binding upon it and in con- before me, I do not believe that the presequence may call upon the Mercantile to senting banks could have legally compelled refund, the Mercantile would have no choice the Mercantile to make the refunds it did. other than to comply. In that event, the I am furthermore persuaded that, no matter state of the account between it and the how peremptory may be the wording of the bankrupt would have been as it was before clearing house rule, the actual practice of the presenting banks had taken the checks its member banks is to make refunds whenback. The fact that the Mercantile had ever checks are returned at any time within temporarily succeeded in getting the money the business day upon which they were preinto its hands would, after it had been com- sented through the clearing house, unless pelled to surrender it again, give the bank- before such return is requested, they have rupt estate no rights it had not before had. in some way committed themselves to their It would make no difference what methods own customers or have received some spethe Mercantile had used to induce the pre- cial information which leads them to believe senting banks to repay unless as a result of that such a return might expose them to their temporary success, the bankrupt es- loss. tate had changed its position as it did As some of the witnesses in substance not do.
expressed it, mistakes and delays are so The issue between the Mercantile and the common and are so often made by every trustee is in reality a narrow one. Could bank that it is not to the interest of any of the presenting banks have compelled the them to insist upon too literal a compliance Mercantile to make the refunds it did? If with the clearing house rule. It is evident so, the trustee is not entitled to complain upon the testimony that returns after 12 that they were made; but if the Mercantile o'clock are common, and that the rule is to paid out the money when the law would not accept them. Doubtless, a bank may dehave required it to do so, it cannot set up cline to do so, and declinations are made, such payments against the trustee. The but they are very few in proportion to the misrepresentation which it is claimed the total number of checks tendered back. To Mercantile made to the presenting banks accept such returns is so nearly a matter was that, according to its books, it did not of course that in one large bank, there are have sufficient funds to meet the checks. as many as 15 or 20 officers or employees Literally this was not true. On the face who have authority to receive them. I canof its ledgers it had more than enough to not therefore find that there is any ground pay them all. The real reason why it sent upon which the presenting banks could have them back was that they were drawn compelled the Mercantile to make the reagainst funds which it feared were as yet payments to them it did, and I therefore uncollected and might always remain so. In must hold that it is not entitled to charge view of the financial clouds which were them against the funds of the bankrupt in hanging over the bankrupt, the Mercantile its possession at the time of the appointdid not wish to take any chances.
ment of the receiver. All but two or three of the numerous wit- I have not lost sight of the argument of nesses for the presenting banks produced by the Mercantile that it was legally bound to the Mercantile testified in open court. make the refunds, because when it returned From listening to them, I am convinced that the checks to the presenting banks, it did the difference between a statement that the not give them the information which it had checks were returned because the Mercan- and to which they were entitled in view of tile's books showed insufficient funds to meet what it was asking them to do and of the them, and the statement that they were sent relation in which it stood to them. The back because drawn against uncollected only fact it then knew was that the bankfunds, was one which no one of the pre- rupt's stock ticker had been taken out by senting banks considered material. Those the order of the New York Stock Exchange. who actually complied with the Mercantile's Such action might have been taken for request would have done so whichever of many reasons other than the real or susthe two explanations had been given. In- pected insolvency of the bankrupt, and very deed, all the real difference between the likely was. There was no occasion for the two statements is that one says, “It looks Mercantile to say anything about it apart like we have not the money here," and the from the possible or probable effect upon other says, "We fear that it may turn out the fortunes of the bankrupt. It is, how