§ 278. Duty of bank to collect interest, when.

A bank cannot accept payment of a note not due and release the maker for interest for the unexpired time. It is bound by the terms set out in the collection, and a failure upon the part of the collecting bank to enforce the provisions of the note or other instrument left for collection, makes the bank liable.

Where a certificate of deposit is left with the bank for collection, which certificate is payable on demand but would have borne interest if the deposit had remained in the bank up to a certain time and no instructions were given to the bank as to the time of collection, the bank having accepted payment of the principal, it is held that it was not guilty of negligence nor any violation of agreement or instructions and that it was not liable for the interest.24

§ 279. Collecting bank's liability as indorser.

A bank receiving paper for collection which requires it, the initial bank, to transmit the collection to another or the collecting bank, should not make itself a general indorser.

A general indorser is one who warrants to all subsequent holders in due course, that the instrument is genuine, and that he has title to the paper, and that all prior parties had power

to contract.

It is held, in the case of Ferguson v. Staples, 82 Me. 159, that the indorsement of a transfer of an over-due town order by the payee for value, raises a contract on his part that the order is genuine and is the legal promise of the town that it purports to be; and even after it has been adjudged void, may elect to sue the indorser upon his contract and recover on the order according to its tenor.

The meaning of an indorsement, as defined by the court of Minnesota, is, that an indorser of a promissory note engages unconditionally that it is in every respect genuine ;— that it is the valid instrument it purports to be, and that the ostensible parties were competent.25

The bank should qualify its indorsement, using such language as would negative a general indorsement.

24 Ide, ex'rx, v. The Bremer Co. 25 Crosby r. Wright, 70 Minn. 251. Bank, 73 Iowa, 58.

It is also the duty of the bank receiving a collection, if it has specific instructions from the owner of the paper directing the initial bank in its course and duty, to transmit such instructions to its agent, the collecting bank.

In the case of Borup v. Mininger, 5 Minn. 417, the court held that it was the duty of the initial bank to convey the instructions received by it from the owner to its correspondent; and no custom could absolve the bank from this duty, as the fixing of the liability of the indorser was the very essence of the undertaking.

It is also held that the initial bank should notify its corresponding bank in a foreign State, of the laws governing protest.20

The above authority also holds that a failure to furnish the corresponding bank the law governing such protests in the place or State where the contract is made, and by reason thereof the corresponding or collecting bank fails to comply with such law, that the initial bank is liable.

In the States where the new negotiable instrument laws are in force, a bank receiving paper which has been indorsed restrictively for collection, it is held that it is liable as a general indorser if it subsequently indorses the paper without qualifi

cation.

This rule is in contravention to the rule adopted by the Federal Court.

The law as laid down by this court is given in the case of United States v. American Exchange National Bank, 70 Fed. Rep. 232. "This was an action by the United States against the American Exchange National Bank to recover the amount of a pension draft which defendant had collected, as collecting agent of another bank; it appearing that the name of the payee had been forged upon the draft after her death."

"Opinion of the Court. The pension draft in this case was paid to the defendant bank by the Sub-treasury, upon the forged indorsement of the payee's name after her death. The Bellaire Bank of Ohio had previously cashed the draft upon the forged indorsement, and thereupon indorsed it for collection' to the defendant bank at New York. The latter was the collecting correspondent of the Bellaire Bank as re

26 Allen v. Merchants' Bank, 22 Wend. (N. Y.) 215.

gards its funds in New York. The collection was made in good faith by the defendant bank and the proceeds remitted to the Bellaire Bank some months before the discovery of the forgery. The indorsement of the forged draft by the Bellaire Bank showed upon its face that the defendant was to act as collecting agent only. The defendant never had any property in the draft or its proceeds. The later authorities sustain the proposition that in any case where the collecting agent pays over the funds before any notice of irregularity or fraud, the remedy is against the principal alone. (Bank v. Armstrong, 148 U. S. 50; White v. Bank, 102 U. S. 658; Sweeny v. Easter, 1 Wall. 166; Wells, Fargo & Co. v. United States, 45 Fed. 337; National Park Bank v. Seaboard Bank, 114 N. Y. 28, 20 N. E. 632.)

"In such cases the indorsement by the collecting agent, who has no proprietary interest, does not import any guaranty of the genuineness of all prior indorsements, but only of the agent's relation to the principal, as stated upon the face of the draft; and as this relation is evident upon the draft itself, the payor cannot claim to have been misled by the indorsement of the agent, or any right to rely upon that indorsement as a guaranty of the genuineness of the payee's indorsement.

"In the case of Onondaga Co. Savings Bank, 12 C. C. A. 407, 64 Fed. 703, as I find upon examination of the record on appeal, no question like the present arose. The Onondaga

Bank was in the same situation as the Bellaire Bank in the present case. It had cashed the forged draft and was collecting the money for its own benefit as owner of the draft. Its indorsement imported a guaranty of the prior signatures; and the defendant's remedy here is against the Bellaire Bank.

"The direction of a verdict for the defendant upon the undisputed facts was, I think, correct, and the motion for a new trial should be denied."

280. When bank liable for fraud or mistakes.

Where a party places in the hands of a bank a draft for collection with instructions to hand the collection to an attorney, the bank failing to do so, and in the meantime the drawee became insolvent, the bank is liable for the loss.27

27 Finch v. Karste, 56 N. W. 123.

The measure of damages for such negligence is prima facie the amount of the paper with interest.28

A bank is liable for a careless mistake, for example: where a note is plainly dated and it mistakes the date and fails to give notice, protest and the like.

The Supreme Court of the State of Pennsylvania says:

"Certainly, when the bank accepts this note for collection, it became its duty to use reasonable care and skill in attending to it: yet herein it is chargeable with a remarkable blunder in treating the date 15th December as if it were the 5th. There can be no doubt that the 15th is there, for anybody can see it who looks, and the court could commit no error in saying that much. But the first figure was not so strongly marked as the other, and therefore the bank's officers interpreted it out rather than overlooked it, and thus made a mistake and had the note presented for payment ten days too soon, and not at the proper time, and thus discharged the endorser. This was clear carelessness; for, if there was any doubt about the date, the bank ought to have refused the collection of it, or to have got the holder to state what was the true date, or to have presented it on both days. To guess a meaning contrary to the expression, is not careful."

Where a bank holding a note for collection receives the amount necessary to pay the same from an agent of the maker, and by mistake gave up to him a similar note of another person and returned the first note to its owner, to whom the maker paid it on demand and immediately, though four days after the payment to the bank, upon examining the note in the agent's hands, discovering the mistake, returned it to the bank and demanded back his money. Held, that he was entitled to it, although the bank had in the meanwhile paid the amount to the owner of the other note, the maker of which was insolvent and discharged for want of demand.29

The question of mistake or more properly negligence is one of fact.

In the case of Baltimore & Ohio Railroad Co. v. Worthington, 21 Md. 275, the court says:

"An absence or want of such care as the law requires in

28 Commercial Bank r. Red River

Valley Nat. Bank, 79 N. W. 859.

29 Andrews v. Suffolk Bank, 12 Gray (Mass.) 461.

the performance of any given undertaking, * fact the finding of which is for the jury."

is a

The rule is that if there is no dispute as to the fact, the question of negligence is one of law.30

§ 281. Liability of initial bank for default of its agents. As previously stated, a bank must use reasonable care in selecting and employing its correspondents, notaries and other agents to assist in or make collections for it.

Where a collection is received by a bank and it agrees to undertake the obligation, it frequently becomes necessary to employ another bank, notaries and agents to perform this duty and make the collection.

When the paper is payable at a distance, this duty arises.

The bank then transmits the collection to its regular correspondent, if it has one, at the place where the paper is payable, if not, it selects a bank and sends the collection with instructions, if special, how to proceed and what to do. The selection having been made, and the paper forwarded, the initial bank, according to the weight of authority, makes itself liable to the owner of the paper for any failure of its correspondent in the performance of its duty.

If the initial bank has no regular correspondent at the place where the collection is to be made, before employing an agent, its duty is to ascertain what bank or person at that place is responsible.

Negligence of the initial bank in this particular, makes the bank liable.

If a bank is employed which is insolvent, where at the time of the employment it was within the means of the initial bank to ascertain this fact, and it failed to do so, the collection being made by the insolvent bank and the proceeds afterwards lost, the initial bank is held liable.

The initial bank is also liable where it selects an unsuitable and particularly incompetent person to give notice to indorsers.

§ 282. Who are suitable agents.

The debtor cannot under any condition or circumstance, be regarded as a suitable agent to be entrusted with the collection

30 Selz v. Collins, 55 Mo. App. 55.