The law of deposits

Preface

This volume is prepared for the special use of bankers and their assistants, the bank clerks, whose sincere and active ambition to improve in efficiency never lags, but whose time is so much occupied with the duties crowded upon them that a general law course is impracticable, while the average law book is incomprehensible. It is hoped that business men will also find it useful.

The author's purpose has been to make a clear statement of the principles governing the law of deposits, explain statutes and, where there is a conflict, indicate to the reader in each state the law in his jurisdiction or the better practice to follow in view of the conflict. Some cases are cited, a reading of which will be profitable; but a general annotation has been omitted, as it would confuse more than enlighten. Most cases cited will be found to be annotated in the reports, and in the National Reporter System the last case is a key to all earlier ones. While the writer has referred to the standard works on the law of banking, such as Morse, Zane, Bolles and others, he has based most of his statements herein on the decisions of the courts as found in the reports of the cases themselves. It is believed that the statements are fully sustained by the authorities.

If the volume is found practical and useful by the banker the author will be more than satisfied. If the legal profession finds it reliable, he will feel well repaid for his labor.

FRED W. WEITZEL.

Washington, March I, 1910.

Sec. 1

Chapter I. Deposits

i. Relation of Depositor to Bank — Where A delivers to B an article of personal property, which B is to keep for A and return to him when the purpose for which the article was delivered has been accomplished, this is in law called a bailment. A, the one who delivers the thing, is called the bailor; B, the one to whom it is delivered, is called the bailee. The thing which is the subject of the bailment may be left with the bailee for repairs, it may be that the bailee is borrowing it for his own purpose, or it may be that it is simply for safe keeping for the bailor. Where the bailment is made for the benefit of the bailor and the bailee receives no compensation or benefit for keeping the thing bailed, but must return that very thing to the bailor, we have what is properly called a deposit, and such is the special deposit.

A general deposit of money in bank differs much from such deposit as is mentioned above. In the case of the bailment the thing deposited remains the property of the bailor and if the bailee use the thing for any purpose other than that for which it was delivered, he will be liable for trespass or conversion. If the thing be destroyed without the gross negligence of the bailee the loss will be on the bailor. With an ordinary deposit in bank, however, a different legal relation arises. The depositor does not expect to receive back the identical pieces of money, as in the case of the bailment. He expects to receive money of equal value, or a credit, and the bank becomes indebted to him for the amount of the deposit. While a deposit is, in effect, a

8 Sec. 2

loan of money to the bank, there are some differences between a loan and a deposit. By various regulations of the business of banks the law places restrictions upon the use which a bank may make of its deposits, while one may make any use he pleases of money he borrows.

2. Classes of Deposits — Bank deposits are usually divided into three classes: general, special and specific.

GENERAL DEPOSITS.

3. When a party opens an account by depositing money, and when a regular customer makes a deposit, unless there is an agreement to the contrary, the bank mingles the amount received with its other funds, the entire fund is the property of the bank, and the depositor becomes, not a bailor, but a creditor of the bank. The relationship, therefore, between a bank and its general depositors, is that of debtor and creditor. The bank is indebted to the depositor in the sum of his deposit and the bank is the absolute owner of the money which it has accepted as soon as the same has been passed over the counter. The depositor has no right to any specific money. He has only a claim against the bank as a general creditor. Bank of Blackwell v. Dean, 9 Okla., 626; Butcher v. Butler, 114 S. W., 564, a Missouri case; Burton v. U. S., 196 U. S., 283. A deposit will be presumed to be intended as a general deposit unless there is an agreement to the contrary, especially where loose money is deposited. If a sealed box, bag or package, or marked envelope containing money were deposited it would be reasonable to presume that it was intended as a special deposit, but evidence of a custom or of intent would be admissible to show whether it was actually a general deposit. Loose money or paper deposited without any agreement or custom to the contrary will be presumed to be a general deposit.

4. In Case of Insolvency — In case of insolvency of the

Sec. 5 9

bank, every general depositor is a creditor of the bank. Technically every creditor is a general creditor, if one is entitled to payment in full it is either because the bank holds a special deposit or security, which has always remained his property, the bank being a bailee under an agreement, or because the bank has violated a trust and by reason of the wrong holds a special fund which belongs to the owner. In a national bank all general depositors and other creditors share alike. In some States the depositors in State banks are by statute preferred over other creditors and are paid in full before other claimants of an insolvent bank.

5. Frequently when a bank fails attempts are made to establish rights to preferences by showing that certain deposits were "special deposits." But the ordinary manner in which banks do and in these days must do, their business, to satisfy the demands of commerce, facilitate negotiations and meet the customs which present day business methods require, and the general intentions of those who do business with banks, when sifted out, will show the fallacy of this clamor for preferred payment of claims, as well as the obvious injustice of the claims. See Sec. 198 et seq.

6. Even though money is deposited for a specified time, or upon unusual conditions, if there is no understanding that the money is not to be mingled, the bank will mingle the amount received with the general mass of its property, and in most States, the deposit is a general one, to be repaid out of the general mass of the bank's assets.

7. One who purchases from a bank a draft drawn on another bank has a claim on the draft only, and not upon the specific money which he paid for the draft, unless the bank official who issued the draft knew when he drew it that there were no funds in the bank upon which drawn to meet it. This of course would be a fraud, and if the purchase money could be traced the purchaser would have a right to recover it. Where, however, a customer of the bank purchases a draft and pays for it by check on his account in the same bank, if the draft is not paid, even though the officer knew when he issued the draft that it would not be paid, the customer would still remain a general creditor. He has simply failed in an attempt to withdraw from his account the amount of the draft purchased. The bank received no actual cash from him. It was a bookkeeping transaction only. He was a general creditor when he purchased the draft, and the draft being worthless he is still a general creditor. Clark v. Toronto Bank, 82 Pac, 582, a Kansas case.

8. If A deposit money in bank to be paid to B, upon a contingency, this is a general deposit unless there is an agreement that the identical money will be kept separate and paid to B. As to whether A or B would be the proper claimant we will discuss hereafter. See Sec. afo 39c.

9. Frequently one who is already a depositor in a bank, for his own convenience, or to prevent confusion, will open another account as "attorney," "agent," or "trustee," etc. It may be that he is treasurer of some organization and wishes to keep the fund as treasurer separate from his own moneys. As to the depositor this is a special fund, but it is not the creation of a special fund as between himself and the bank, except that checks drawn on his personal account cannot be charged against the special account, and vice versa. It represents an account of a general creditor and in case the bank failed there would be a general claim only.

10. Where an officer of a State or of the Federal Government is not prohibited by law from depositing his money as such officer in bank, and he does deposit it, this is a general deposit. A case recently decided in Oklahoma holds that where the officer did not have authority, though not prohibited, the deposit was wrongfully made and when the bank failed the fund was held to be a trust fund and paid prior to other creditors. This case is contrary to the decisions in other States and was not well considered. Watts v. Board of Com'rs., 95 Pac, 771 ; In re Salmon, 145 Fed., 649, and see Par. 27b. Usually security is required to protect the Government and the officer is held personally liable, but as to the assets of the bank there is only a right to share with other creditors. If the law prohibits the deposit by an officer, the bank is guilty of a wrong in receiving such deposit and where the money can be traced it can be recovered in full.

11. If money be deposited in bank to A's credit, A intending to use the money for a special purpose, this does not alone make it a special deposit. It is not any special purpose, use or trust which A impresses upon the deposit which makes it a special deposit. No matter what A might intend to use the money for, it is a general deposit unless otherwise made special.

12. One who holds a certificate of deposit is a general creditor, except where he is given preference as a depositor in a State or savings bank under the State law.

13. Deposit a Debt — After the deposit has been made, the indebtedness of the bank is absolute until payment. The title to the money passes to the bank and, though the identical pieces of money be stolen, embezzled or destroyed before the deposit is mingled with the other moneys of the bank, the bank is indebted to the depositor just the same. If the bank be insolvent when the money is received, yet the money becomes the property of the bank and the depositor becomes a creditor to that extent, unless the officers knew that the bank was actually insolvent at the time the money was received. If a bank receive deposits after business hours and hold same over till the next day, and the bank fails to open the next day, the deposits should be returned, unless the bank was in the habit of receiving deposits after usual business hours, when they would be regarded as having been accepted on that day.

14. Forged or Counterfeit Paper. — If forged or counterfeit paper or money be deposited, even though the amount purporting to be represented by such deposit has been credited to the depositor, the depositor is entitled to no credit and the amount can be charged back to his account. The paper or money being worthless, no consideration passed to the bank for the credit given and the bank is not bound thereby. See Sec. 88e, 112, 138.

SPECIFIC DEPOSITS.

15. A specific deposit is where money is deposited with a bank with specific instructions to apply the money in a certain way, as to pay a note of the depositor, or to credit to some one else, or to take up a mortgage, etc. In such cases the bank must follow instructions and use the money for the purpose for which it was deposited, and if it does not do so, or misapplies the fund, the money can be recovered, provided the bank received money, or collected money from paper received and it can be traced. See Sec. 201.

Where money is deposited in Bank A, to the account of Bank B, with instructions to telegraph the amount to Bank C, this is a specific deposit. It is not a special deposit, for the reason that it is not to keep the money or deliver the identical pieces to C, and it may mingle the money received with its other funds, but it must telegraph a like amount to Bank C. It is not a general deposit because there is a duty to perform, and if it violates this duty it will not be indebted to the depositing bank, but will be deemed a trustee with a fund of $1,000 in its hands belonging to Bank B by reason of the wrong committed. If the $1,000 remains in Bank A, or there is on hand a like amount which cannot be proved to have come in afterwards and to have some other trust attached, it can be recovered.

16. Items deposited with a bank for "collection only,"

money collected by the bank as agent and money deposited for the purpose of having the bank send, lend or pay the same, also papers delivered to the bank as security, are the property of the depositor, and if the bank violates its duty, or fails before it has had an opportunity to perform the duty, and the items or the proceeds thereof remain in the bank at the time it is closed, or come in after the bank has been closed, they should be returned to the depositor in full. So where a bank, the officers not being certain as to its solvency, keeps out deposits and marks them with the depositors' names, and the bank is found to be insolvent and closes, the deposits so held out should be returned in full. In any case there can be no return, or payment in full before other creditors, unless the item or money can be traced into the hands of the receiver. Commissioners of Crawford Co. v. Strawn, 157 Fed., 49. See Sec. 201.

17. Change From One Class to Another — A general deposit may, by agreement or order, be changed to a special deposit or a specific deposit. Likewise a specific or a special deposit may be changed to a general deposit, a specific deposit to a special, and a special to a specific.

Where a general deposit is ordered to be changed to one of the other class, however, the depositor remains a creditor until the change has actually been made and the money actually separated in the case of a special deposit, and the appropriaion actually made by the bank in the case of a specific deposit. This is because the bank does not actually receive money, but changes a credit of the general depositor into a fund.

SPECIAL DEPOSIT.

18. Where bonds, stocks, or other valuables, or money in a separate package (or even loose money where the identical pieces are to be kept) are placed with a bank, to be kept and the identical articles returned, we have a special deposit. The owner has the right to have the specific articles returned, and if the bank has made any profit by a wrongful use of articles, the depositor, who is in this case a bailor, is entitled to receive the profits also. The main function of the bank, in the beginning, was the safe keeping of valuables in this way, but in our times the safe deposit vaults are used for this purpose.

19. Power of Bank to Receive — A bank has power to receive special deposits. Although the right of a national bank to do so was questioned at one time, the power is now regarded as one of the incidental powers of the bank. The National Bank Act impliedly authorizes the taking of special deposits, for Section 5228 of the Revised Statutes of the United States provides for delivery of special deposits by banks which have defaulted in payment of circulating notes. Some of the States expressly authorize the State banks to receive special deposits.

20. Liability of Bank For — Where there is a special deposit the very thing deposited must be returned to the depositor, or held for the special purpose for which it was made. In the case of a general deposit we learned that the bank was debtor and the depositor creditor for the amount. Not so here. The bank is bailee and the property remains the property of the depositor, or a trust fund for the purpose for which it was made. If the bank use such diligence as a prudent man would use in attending to like affairs the bank will not be liable for a loss. In fact, in some States it is held that only such diligence need be exercised as the bank uses in its own affairs. Where the bank uses care in selecting its officers and employees and trusts its own property to them along with the property of the special depositor, and the officers or employees, outside of their line of duty, steal or embezzle the special deposit, the bank will not be liable. If the bank knew, or ought to have known, that the employee or officer was dishonest, or might have known by using such care as a prudent man would use in such cases, I think the bank would be liable. While some cases have held that only such care as the bank uses in its own affairs need be exercised, banks nowadays usually have strong safe deposit vaults and facilities for keeping valuables, and they also usually have men whose reputation for honesty and integrity induces customers to make such deposits. The depositor having the right to feel secure, the bank ought to be called upon to use more care in the selection of its officers and employees than some banks do, and it ought to be held to the care that a prudent man would exercise. And the decisions are tending in that direction. Of course where the bank is compensated, or receives a direct benefit by accepting the special deposit, it will be held to a greater degree of care than where it performs the service of safe keeping without compensation.

21. Returning — If the bank is negligent and delivers the special deposit to the wrong person the bank will be liable. As where a bank delivers to a depositor's wife a special deposit, without requiring the production of the receipt or an order from the depositor; and where an order calling for coupons from bonds specially deposited is not carefully read and the bonds themselves delivered to the bearer of the order, the bank will be held liable.

22. Not Assets of Bank — As the bank is merely a bailee of property specially deposited, the title remains in the depositor and cannot be counted as assets of the bank for any purpose.

23. When Is A Deposit Special? — In speaking of general deposits it was pointed out that many deposits ordinarily termed "special" are really general deposits. An express agreement when special deposits are taken would save trouble for all parties concerned. When there is no agreement or custom, a deposit of loose money or paper will be regarded as a general deposit (leaving out the consideration of the question of collections), and a package, box or bag of money, sealed, or of other valuables, would be presumed to be a special deposit, to be held separately by the bank.

24. What May Be Subject of Special Deposit — Anything which a bank consents to receive on special deposit may be the subject of such deposit. First National Bank of Carlisle v. Graham, 100 U. S., 699. Preston v. Prather, 137 U. S., 604. Butcher v. Butler, 114 S. W., 564.

Chapter II. The Depositors

25. Deposits, when classified according to the depositors for whose accounts they are carried, may be divided into individual, bank and public deposits.

All deposits by private individuals as such, by individuals as representatives of other individuals or bodies of individuals, by companies, firms, corporations, partnerships, etc., are individual deposits.

The general legal status of an individual depositor is no different from that of a bank which deposits in another bank, but as the national and state banking laws provide the manner of keeping reserves, public deposits, and deposits in other banks, and the banking authorities of the state and federal governments require separate accounting in regard to these different items in the reports made by banks, they are divided into individual deposits, public deposits, deposits in banks which are reserve agents and deposits in banks not reserve agents, etc. A subsequent chapter deals with reserves.

Except where otherwise noted, the principles stated herein relate to all deposits, whether individual deposits or deposits by banks.

26. Bank May Select Its Depositors — A railroad generally must accept such business as is tendered it ; a hotel keeper admit all comers ; i. e., they cannot at their own pleasure accept of refuse to accept passengers or guests. A bank, however, while it is in the nature of a public institution (called quasi-public), need not accept deposits tendered it unless it wishes to serve the one making the tender, and if a bank does not wish to retain the deposit of one who has been a depositor, it may close the account, tender him the balance due and refuse to receive further deposits from him. Likewise the depositor may terminate the relation at any time he sees fit, by withdrawing his balance, unless the bank has some lien or right of set-off against it, or there is a contract whereby the money must be left for a specified time. In the latter case, however, it would be a loan and not a deposit. Thatcher v. State Bank, 7 N. Y. Sup. Ct, 121. 27. Deposits of Public Moneys — The State statutes provide the manner in which deposits of public funds of the State, county or city shall be kept. These statutes should be carefully followed by the officers making deposits and by the banks receiving them. If the State law gives the county the right to make any regulations, or empowers the city, by its municipal government, to make ordinances regarding the keeping of the funds, all these should be carefully complied, with. Be sure that the officer who makes a deposit of public moneys has authority to deposit it, and then be sure that he has authority to make the deposit in your bank. In some States the officer who holds public money is personally responsible for it, in which event he may, but ought not, treat it the same as his own money. In some States he is neither expressly authorized nor prohibited from depositing funds in banks and is not held liable if he uses care in selecting the bank, and in watching the conduct of the bank and its condition. If he has no discretion in making the selection, but must deposit in such depositary as is designated, he will not be personally liable if he obeys the law and the designated depositary fails. In case the officer is personally liable and makes good to the government, he will have a claim against the bank for the deposit. In that event, the money being his own, he could offset it against a private debt due the bank.

27a. Public deposits should always be carried as such, both for the protection of the bank and its creditors, and for the protection of the officer.

27b. It has been held that where a public officer is prohibited by statute from "loaning" the public funds, he will not be liable for a violation of the statute if he deposits the money in bank, even though at interest, provided the money is always subject to his order. Baker v. Williams & England Banking Co., 70 Pac, 711, 42 Oregon, 213. If it is made unlawful by statute for him to deposit the money in bank or in any but designated banks, and a bank not authorized receives a deposit from him, the bank will be liable to the State as a trustee with funds of the public, and the amount can be recovered in full. Brown v. Sheldon State Bank (Iowa) 117, N. W., 289. If the bank be insolvent, however, only so much as can be traced can be recovered in full, and the government is creditor for the balance. Commissioners of Crawford County v. Strawn, 157 Fed., 49.

28. There is nothing in the laws relating to national banks which will prevent a national bank from becoming the depositary for State, county or city moneys. The question is whether the laws of the State allow or prevent deposits in national banks. Bank v. Ferguson, 48 Kan., 732.

29. Public Moneys of the United States — The Revised Statutes of the United States provide as follows:

"It shall be the duty of every disbursing officer having any public money intrusted to him for disbursement to deposit the same with the Treasurer or some one of the assistant treasurers of the United States, and to draw from the same only as it may be required for payments to be made by him in pursuance of law; and draw from the same only in favor of the persons to whom payment is made, and all transfers from the Treasurer of the United States to a dis • bursing officer shall be by draft or warrant on the Treasurer or assistant treasurer of the United States. In places, however, where there is no Treasurer or assistant treasurer, the Secretary of the Treasury may, when he deems it essential to the public interest, specially authorize in writing the deposit of such public money in any other public depository, or, in writing, authorize the same to be kept in any other manner and under such rules and regulations as he may deem most safe and effectual to facilitate the payments to public creditors."

It will be noted that the above section permits the Secretary of the Treasury to authorize deposits in other public depositaries in places where there is no Treasurer or Assistant Treasurer. These depositaries must have been previously designated by the Secretary of the Treasury as provided by Sec. 5153 of the Revised Statutes of the United States, as amended by the act of March 4, 1907:

"All national banking associations, designated for that purpose by the Secretary of the Treasury, shall be depositaries of public money, under such regulations as may be prescribed by the Secretary; and they may also be employed as financial agents of the Government ; and they shall perform all such reasonable duties, as depositaries of public money and financial agents of the Government, as may be required of them. The Secretary of the Treasury shall require the associations thus designated to give satisfactory security, by the deposit of United States bonds and otherwise, for the safe-keeping and prompt payment of the public money deposited with them, and for the faithful performance of their duties as financial agents of the Government : Provided, That the Secretary shall, on or before the first of January of each year, make a public statement of the securities required during that year for such deposits. And every association so designated as receiver or depositary of the public money shall take and receive at par all of the national currency bills, by whatever association issued, which have been paid into the Government for internal revenue, or for loans or stocks : Provided, That the Secretary of the Treasury shall distribute the deposits herein provided for, as far as practicable, equitably between the different States and sections."

30. The regulations of the Treasury Department provide, under the statutes, how public deposits shall be received and kept. Any national bank desiring to be designated should write to the Secretary of the Treasury for information as to how it should proceed to be designated and authorized to act as a public depositary. The Treasury Department furnishes no forms for application, but if an application is received by the Department the applicant will be advised whether it is worth while seeking designation. Local necessity for such depositary and the political and public backing count for much. If designated full instructions will be furnished.

31. Since the act of May 30, 1908, national banks acting as depositaries must pay at least 1% interest on public deposits.

"That all national banking association designated as regular depositaries of public money shall pay upon all special and additional deposits made by the Secretary of the Treasury in such depositaries, and all such associations designated as temporary depositaries of public money shall pay upon all sums of public money deposited in such associations interest at such rate as the Secretary of the Treasury may prescribe, not less, however, than one per centum per annum upon the average monthly amount of such deposits : Provided, however, That nothing contained in this Act shall be construed to change or modify the obligation of any association or any of its officers for the safe keeping of public money : Provided further, that the rate of interest charged upon such deposits shall be equal and uniform throughout the United States.''