3 1 8

c r e d i t ' ma ture of c o l l e c t i o n 1tbms.

( A r t i c l e in 13 Virg in ia Law R e g i s t e r , U . S . , 2 9 6 )

In an able a r t i c l e appearing in the May, 1927 i s s u e of the Vir-

g i n i a Law Reg i s t er , Mr. George Bryan cons iders the t r u s t nature of

the proceeds of c o l l e c t i o n of items sent by one bank to another f o r

c o l l e c t i o n , and without attempting to consider a t l ength the reason

and p r i n c i p l e of the quest ion, concludes that the courts of V irg in ia ,

among o t h e r s , s trongly favor the t rus t theory, whi l e in North and South

Carolina tho items are considered a simple debt.

This a r t i c l e , without attempting c i t a t i o n of supporting author i ty

a t l ength w i l l attempt a cons iderat ion of the reason and p r i n c i p l e

c o n t r o l l i n g the quest ion.

two methods.

In general there are two methods u t i l i z e d between banks f o r the

c o l l e c t i o n of checks, known as the rec iproca l accounts method and the

remittance method.

In the r e c i p r o c a l accounts method the sendee bank, upon c o l l e c t i o n ,

c r e d i t s the forwarding bank, and balances between the two are s e t t l e d

from time to time on demand.

In the remittance method, the sendee bank, upon c o l l e c t i o n , i s

Required to make immediate remittance. By banking p r a c t i c e ' t h i s r e -

mittance u s u a l l y takes the form of an evidence of indebtedness . A check

or draf t may be drawn by the sendee bank on i t s e l f and transmitted to

the forwarding bank, or the sendee may draw a check or d r a f t payable

X-4983

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3 1 3

to the forwarding "bank and draw on funds on depos i t by the sendee wi th

some t h i r d bank more convenient ly loca ted to the forwarding bank and to

which the forwarding bank can more convenient ly present for payment.

r e l a t i o n b e f o r e c o l l e c t i o n in b o t h methods.

Mo d i f f i c u l t y can a r i s e in e i ther the rec iproca l accounts or remittance

method of c o l l e c t i o n as to the r e l a t i o n of the forwarding and sendee banks

up to the moment of c o l l e c t i o n by the l a t t e r of the forwarded i tems. The

courts wi th some uni formity hold that the r e l a t i o n i s that of Pr inc ipa l and

Agent. This was of dec i s ion in the case of F i r s t National Bank v. Payne,

85 Va. 890 and i s recognised in the l a t e case of Federal Reserve Bank v .

Pe ter s , 139 7a. 45.

r e c i p r o c a l ACCOUNTS method, r e l a t i o n a f t e r c o l l e c t i o n .

In the rec iproca l accounts method no e s p e c i a l d i f f i c u l t y can a r i s e

as to the r e l a t i o n of forwarding and sendee banks a f t e r c o l l e c t i o n by the

l a t t e r of the forwarded i tems. The sendee bank c o l l e c t s the i tems, de-

p o s i t s the proceeds with i t s general a s s e t s and c r e d i t s the forwarding bank.

The word 11 credit" g i v e s the keynote; the proceeds of c o l l e c t i o n have

become a debt due to the forwarding bank as c l e a r l y as are the funds of any

other depos i tor , and the r e l a t i o n of Pr inc ipa l and Agent between the two

banks has become that of Creditor and Debitor.

This i s hornbook law. What i s the reason and p r i n c i p l e upon which

i t i s founded? I t i s submitted that the elemental and d i s t i n g u i s h i n g character-

i s t i c between the r e l a t i o n of debtor and cred i tor and a f i d u c i a r y r e l a t i o n s h i p

i s , in i t s l a s t a n a l y s i s , the question whether c r e d i t has been given or wheth-

er no c r e d i t has been given and, by agreement or requirement of law, the

b e n e f i c i a l ownership of the funds cont inues in the person who otherwise would Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

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be a credi tor of the second. -= -L

The d i s t i n g u i s h i n g c h a r a c t e r i s t i c of the true t rus t character of funds

i s the p r o t e c t i o n of such funds imposed "by law. The d i s t i n g u i s h i n g charac-

t e r i s t i c of the f i d u c i a r y character of funds in the hands of an agent , s er -

vant, or l i k e character i s the p r o t e c t i o n of such funds imposed "by law and

contract . This p r o t e c t i o n to the c e s t u i que t r u s t i s the cont inuing

s ecur i ty and i d e n t i t y of such funds, the requirement that such funds must be

kept separate and apart by the f iduciary, from those of h i s own. By keeping

the funds separate they are n e c e s s a r i l y funds and not a c r e d i t extended by

the c e s t u i que trust to the f i d u c i a r y and a debt due by the l a t t e r to the

former,

CONSTRUCTIVE TRUSTS - IMPRESSING- 3WDS WITH A TRUST.

This requirement that trus t funds be kept separate and apart from per^

sonal a s s e t s i s an elemental l e g a l duty in the f i d u c i a r y and i t s breach i s

a v i o l a t i o n of that duty for which equity g i v e s remedy by means of i t s

maxim that "Equity regards, that done which ought to have been done." If

the f i d u c i a r y has mingled f i d u c i a r y funds with h i s own, has f a i l e d to keep

such funds separate and apart , equity app l i e s the maxim and secures the prof

t e c t i o n to the c e s t u i que t rus t of i d e n t i t y and secur i ty , of such funds by

impressing the commingled a s s e t s with a t r u s t .

From the bare statement of the maxim, i t i s obvious that f a i l u r e to keep

the funds separate and apart must be a l e g a l or contract duty to g ive equity

j u r i s d i c t i o n , a n d that where the funds are commingled by agreement, equi ty

has no j u r i s d i c t i o n , in the absence of other f a c t s , to impress the commingled

a s s e t s wi th a t r u s t . Equity cannot do so because there i s no t r u s t , a debt

has come into be ing ins tead . There i s no v i o l a t i o n of duty f o r which to

g ive remedy. Equity cannot impress a trus t to cause that done which should

have been done, because the commingling of the funds by the once f i d u c i a r y Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

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was the doing of exact ly that which he should have done. I t was the execution

of h i s agreement with the former ces tu i que t rus t , and by the execution of

h i s agreement the funds have l o s t their f iduc iary character, the p a r t i e s

their f iduc iary re la t ionsh ip and the re la t ionsh ip has become that of

debtor and creditor*

Pom. 2q. Jur i s . (3rd Ed.) Par. 1044

it* * * exhaustive analys i s would show, I think, that a l l in-stances of construct ive t rus t s properly, so c a l l e d may be re ferred to what equity denominates fraud, e i ther actual or construct ive , as an e s s e n t i a l element, and as the ir f i n a l source. Even in that s ing le c l a s s where equity proceeds upon the maxim that an intent ion to f u l f i l l an obl igat ion should be imputed, and assumes that the purchaser intended to act in pursuance of h i s f i d u c i a r y duty, the notion of fraud i s not involved simply because i t i s not abso lute ly necessary -under the circumstances; the ex i s tence of the trust in a l l cases of t h i s c l a s s might be re ferred to con-s truc t ive fraud. Certain species of construct ive trusts a r i s e from actual fraud; many others from the v i o l a t i o n of some pos-i t i v e duty ( i t a l i c s supplied); in a l l the remaining instances there i s , l a t ent perhaps, but none the l e s s r e a l , the necessary element of that unconscientious conduct which equity c a l l s fraud. Courts of equity, by thus extending the fundamental pr inc ipa l of t rus t s - that i s , the pr inc ipal of the l e g a l e s ta te in one and the equitable e s t a t e in another - to a l l cases of a l l cases of actual or construct ive fraud and breaches of good f a i t h , are enabled to wield a remedial power of tremendous e f f i c a c y in protect ing the r i g h t s of property; they can fo l low the rea l owner's s p e c i f i c property and preserve h i s rea l ownership * *

Thus i t i s submitted, there can be no f iduc iary re la t ionsh ip to a s s e t s

commingled by agreement, to a s s e t s commingled not in v i o l a t i o n of a l e g a l or duty or contract

contract duty but instead commingled pursuant to a contrac t / r ight . I t i s

submitted that the ac id t e s t in cases of c o l l e c t i o n by one bank for another

i s whether the sendee bank has, by agreement, express or implied, the r ight

to commingle the proceeds of c o l l e c t i o n with i t s ovm a s s e t s , or d i f f e r e n t l y

phrased - s ince the re la t ionsh ip of debtor and credi tor i s d iametr ica l ly

opposed to the f iduc iary re la t ionsh ip - whether the transaction creates

r i g h t f u l l y a debt due by the sendee to the forwarding bank. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

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REMITTANCE METHOD*

In the so c a l l e d remittance method of c o l l e c t i o n the sendee "bank may "be

required to remit the proceeds of c o l l e c t i o n "by shipment of cash or currency,

or "by transmission of a check or draft drawn on i t s e l f or on some third bank

at which i t has funds on deposi t , or by e i ther method in i t s e l e c t i o n .

. r . S $ H M T C S S t CASH,

In the case of remit r a re e required to be made by shipment of cash or

currency, i t i s obvious t h a t the agreement does not contemplate any comming-

l i n g of the c o l l e c t e d items with the general a s s e t s of the sendee, but in

f a c t s p e c i f i c a l l y provides against i t . The agreement does not contemplate

a subst i tut ion of cred i t for cash, but s p e c i f i c a l l y provides that the remit-

tance be money. In short the agreement secures to the forwarding bank the pro-

tec t ions of i d e n t i t y and secur i ty of the c o l l e c t e d funds f the hallmark of the

f iduc iary r e l a t i o n , thereby preserving the i n i t i a l re la t ionsh ip of Pr inc ipal

and Agent throughout the transact ion.

REMITTANCE BY CHECK OR DRAFT.

Checks and dra f t s are evidences of debt, and in the absence of a spec ia l

s t ipu la t ion to the contrary, the sendee bank would be authorized to draw such

check or draft against i t s general a s s e t s . The transaction thus contemplates

the issuance of an evidence of indebtedness against the general a s s e t s of the

bank - the creat ion of ^ debt against i t s general a s s e t s due by the sendee to

the forwarding bank. Correspondingly the sendee bank would be impliedly

authorized to deposit the proceeds of c o l l e c t i o n with i t s own general a s s e t s

to o f f - s e t or balance the debt created against such a s s e t s by the check or

draf t . The commingly of a s s e t s r i g h t f u l l y , the creation of a debt be-

tween the p a r t i e s , the abandonment of the r ight of the ce s tu i que trust to

the secur i ty and i d e n t i t y of separately kept funds are not the badges of a Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

3 1 7 - 5 - X-4983

trust or f i d u c i a r y re la t ion; they are the l i v e r y of debtor and credi tor .

In f a c t there i s l i t t l e to d i s t inguish the general depositor of the

sendee bank fror.; the forwarding bank in their r e l a t i o n s with the sendee.

The depositor entrusts h i s funds to the sendee bank of deposi t , consenting

that such funds be commingled with the sendee bank's general a s s e t s , becom-

ing i t s cred i tor and accepting in l i e u of the protec t ion of s ecur i ty and

ident i ty of a s s e t s separately kept, the debt from the bank to him.

The forwarding bank p laces evidences of debt in the hands of the sendee

bank, the l a t t e r c o l l e c t s them, and the forwarding bank consents that they

be commingled with the general a s s e t s of the sendee bank, d i rec t ing that in

l i e u of the secur i ty and ident i ty of the proceeds of c o l l e c t i o n separately

kept, an evidence of indebtedness against the general a s s e t s of the sendee

bank be transmitted to i t , d irect ing that a debt to i t be created out of the

general a s s e t s of the sendee bank.

pseubo DISTINCTION.

The d i s t i n c t i o n between the two cases which suggests i t s e l f i s that a

bank depositor has consented that the bank become h i s debtor for an i n d e f i n i t e

time while the forwarding bank, s t ipu la t ing for an immediate transmission of

check or draf t , at bes t has consented that the proceeds of c o l l e c t i o n take

the form of an evidence of debt only for a short and determinable period -

that required for .the check or draft to be transmitted to i t and by i t pre-

sented. Again the forwarding contract suggests that the cred i t extended to

the sendee for t h i s interval i s conditioned on the due payment of the paper;

that the paper i s not a payment u n t i l honored, and i f dishonored, the par-

t i e s revert to the ir or ig ina l f iduc iary re la t ionsh ip .

The argument, in short, i s that a ces tu i que trust can, by agreement,

waive h i s r ight to the preservation of the f i d u c i a r y a s s e t s separate and

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x~4983 318 apart from the personal a s s e t s of the f iduc iary and pro tern become a simple

creditor of the f iduc iary , but reasser t ing the f iduc iary re la t ionsh ip and

converting the debtor into a f iduc iary again in the event of the l a t t e r 1 s

f a i l u r e to pay the debt. The argument makes the mere f a i l u r e of a debtor to

pay a debt, by agreement, r e v i v i f y or re -create a trust r e l a t i o n s h i p . I t

invokes the doctrine of equi ty 1 s presumption that that was done which should

have been done, and asks equity to impress a trust on the commingled a s s e t s

to preserve an equitable f i c t i o n that the funds have not been commingled,

when that 'Mich was a c t u a l l y done with such a s s e t s - the ir corjmingling - was

r i g h t f u l l y done pursuant to agreement and consent, and that which a c t u a l l y

was done which should not have bsen done was the f a i l u r e j f a debtor to pay

a*debt, at a time "hen the debtor was a debtor and nothing e l s e , was without

a v e s t i g e of the character of a f iduc iary . The argument needs no comment.

If i t i s the law, reason has forsaken the law.

THE VIRCHMIA CASES.

Overseers of the Poor, Etc. v. Bank of Virginia, , 2 Gratt.544.

An attorney, rece iv ing payment of a c l i e n t ' s judgment by check, deposited

i t to h i s general bonk account for c o l l e c t i o n and died with h i s account some

few dol lars overdrawn. On the question whether the c l i e n t was e n t i t l e d to a

p r e f e r e n t i a l claim on the depos i t , Held;

The deposit i s impressed with a t rus t .

Since the- attorney, in the absence of an agreement to the contrary, owed

h i s c l i e n t the duty, a r i s i n g from the f iduc iary r e l a t i o n , of preserving h i s

c l i e n t ' s funds separate and apart from h i s own, h i s f a i l u r e to do so created

a construct ive t rus t , founded on the v io la t i on of h i s duty, and the dec i s ion

i s c l e a r l y r i ^ i t .

I t i s submitted that the decis ion has not the s l i g h t e s t appl icat ion to

the case where the coiuningling of a s s e t s i s not the v i o l a t i o n of a trust or Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

— 8 — X—49 83 "t-*s

f iduc iary duty, out i s , instead, the exact performance of an agreement between

the p a r t i e s .

F irs t National B-ank of Alexandria v. Payne, 85 Va.890,

By agreement the forwarding and sendee banks c o l l e c t e d for and credited

to each other the proceeds of c o l l e c t i o n items, s e t t l i n g balances between them-

se lves from time to time. The sendee bank was a partnership. I t rece ived

items for c o l l e c t i o n , thereupon one partner died and the surviving partner

c o l l e c t e d the i t e^s and credi ted the forwarding bank. On insolvency, Held;

claim of the forwarding bank i s p r e f e r e n t i a l .

A careful reading of the opinion w i l l demonstrate that the dec i s ion i s

based on the l og i c of the fo l lowing chain;

(1) Before c o l l e c t i o n of the items the sendee bank was an agent of the forwarding bank.

(2) Had c o l l e c t i o n and d i spos i t i on of the proceeds been made pursuant to and by authori ty of the agreement, the r e l a t i o n between the two banks would have become thereupon that of debtor and cred i tor .

(3) By the partner ' s death before c o l l e c t i o n , the f irm was d i s so lved , and i t s authority to proceed with the c o l l e c t i o n and d i spos i t i on of the proceeds was at an end.

(4) The ac t of the surviving partner in so doing was hence without authority .

(5) Being without authority i t did not operate to terminate the i n i t i a l re-l a t i o n of Pr inc ipa l and Agent and subst i tu te that of Debtor and Creditor

(6) The re la t ion of Pr inc ipal and Agent continuing, the Agent was under the duty to preserve h i s P r i n c i p a l ' s funds apart from h i s own.

(7) His f a i l u r e to do so was a v i o l a t i o n of f iduc iary duty, and equity, t rea t ing that done which should have been done, w i l l impress a trust on the commingled a s s e t s .

I t w i l l be no t i ced t h a t the ent ire decis ion hinges on the v i o l a t i o n of a

f iduc iary duty by a f iduc iary , (agent ) at a time when he was a f i d u c i a r y - the

commingling of f i d u c i a r y funds with personal a s s e t s and without authority from

the ces tu i que t rus t . I t i s submitted that the dec i s ion has no appl icat ion

to the case where the agreement to mingle trust a s s e t s with individual a s s e t s Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

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i s in force and operative at the time such commingling takes p lace . In

such case there i s no v i o l a t i o n of duty, no grounds for e q u i t y ' s j u r i s d i c t i o n

to attach.

The next case to he c i t e d i s s ta ted "by Mr. Bryan in the a r t i c l e bn- him

heretofore mentioned, to be the leading case i n Virginia and the opinion i s

by him characterized as an informing and wel l reasoned d iscuss ion of the

law in po in t . I t i s c er ta in ly informing and presents i n t e r e s t i n g contrasts

to the rat ionale of the foregoing discussion, and i s indeed a landmark i n the

law of the subject i n Virginia , in carrying and applying the construct ive

trust theory to a case where, i t i s submitted, i t i s not poss ib l e to d i s -

cover a Vio lat ion of t r u s t duty. .

Federal Reserve Bank v. Peters , 139 Va. 45.

The forwarding bank, in sending checks drawn on the sendee bank for co l -

l e c t i o n , s t ipu la t ed that a l l c o l l e c t i o n s of such items made by the sendee

should be remitted immediately to the forwarding bank by one of two methods;

By ( l ) shipment of money of currency, or

(2) by means of a draft drawn by the sendee bank on some th ird bank with which i t had funds on deoos i t .

In making remittance of c o l l e c t i o n s the sendee e l e c t e d to do so by the

second method above, by means of a draft on a third bank loca ted near the

forwarding bank and a t which i t had ample funds on deposit to pay the dra f t .

The sendee f a i l e d before the draft could be presented, and on the question

whether the proceeds of c o l l e c t i o n const i tuted a trust fund, Held: claim of

forwarding bank i s p r e f e r e n t i a l .

Had the sendee employed the f i r s t method of remittance given i t by

contract - by shipment of money or currency - the case would have been one

in which the hallmark of the trust re la t ionship was present throughout the

ent i re t ransac t ion and c l e a r l y the dec is ion would have been r i g h t . Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

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The sendee bank, however, adopted the second e l e c t i o n given i t by express•1

contract with the forwarding "bank, and made or attempted to make remittance by

a draft drawn by i t on a th ird bank. It i s submitted that by so doing pursuant

to agreement the sendee thereby terminated i t s r e l a t i o n of agent to the forward-

ing bank and instead became the l e t t e r ' s debtor. I t i s submitted that , having

once become the l a t t e r ' s debtor, the mere f a i l u r e of the l a t t e r to pay the

debt did not and could not r e v i v i f y the trust re la t ionship i n i t i a l l y e x i s t i n g

between the two banks, nor charge the dead body of an i n s o l v e n t ' s debt with

the l i f e b l o o d of a t r u s t . The sendee bank, having become the forwarding bank's

debtor, remained i t s debtor.

The court i n i t s opinion avoids th i s conclusion by premising that , under

the remittance method of c o l l e c t i o n , the sendee ac ts throughout the transact ion

as the spec ia l agent of the forwarding bank. This being true i t neces sar i ly

fo l lows that as soon as the c o l l e c t i o n s are made they become the property of

the forwarding bank; the sendee has no implied or express authority to lend

or otherwise dispose of the proceeds of c o l l e c t i o n ; the draft in payment of

c o l l e c t i o n s i s not payment u n t i l honored, and hence the draft did not upset

the t rus t . So reasons the court from i t s or ig inal promise.

THE BASIC FALLACY OF THE DECISION.

It i s submitted that the bas ic fal lacy, of the dec i s ion l i e s in i t s

threshhold holding that , under the so - ca l l ed remittance plan of c o l l e c t i o n

the sendee continues in a f iduciary capacity (agent1) throughout the transac-

t ion . As has been e a r l i e r noticed, t h i s i s true only where the remittance

i s made i n cash. Actually where the remittance i s made in evidences of in -

debtedness pursuant to contract , credi t , at l e a s t pro tea, i s granted, and

the designation of the plan of c o l l e c t i o n as a remittance plan i s somewhat

a misnomer. In i t s cred i t feature the plan i s , in i t s l e g a l a t t r i b u t e s ,

more c l o s e l y a l l i e d to the rec iprocal accounts method than to the method of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

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transmission of proceeds of c o l l e c t i o n by shipment of cash.

I t i s submitted that hed the court approached the question, not by de-

termining the r e l a t i o n between the two "banks as a premise, hut had examined

the contract "between the two "banks and the mechanics and e s s e n t i a l inc idents

of the whole transact ion with a view to determining from those fac tors the

color and character of the re la t ionsh ip created "by the p a r t i e s themselves "by

the i r contract , the dec i s ion would have "been otherwise.

In th is case the sendee "bank had the r ight "by contract to remit "by draft ,

and did transmit such draft to the forwarding "bank. The draft was drawn on

a th ird "bankat which i t had ample funds on deposit to pay the draf t . These

funds or cred i t s were a part of the general a s s e t s of the sendee bank and in

drawing against such general a s s e t s in the exact manner in which the forwarding

bank had s t ipulated , the sendee created a debit against such general a s s e t s .

The items forwarded for c o l l e c t i o n cons is ted of checks drawn by thr

depositors of the sendee bank against the ir respect ive deposits with such

bank. Co l l ec t ion cons i s ted of debiting each depos i tor ' s Balance with the

amount of such checks by him drawn. The to ta l of such debits was a credi t

in the hands of the sendee bank. What was i t s duty with r e l a t i o n to t h i s

credit? 7;as i t required to segregate s p e c i f i c money in l i k e amount and hold

i t in a separate fund u n t i l the draft in process of transmission to the f o r -

warding "bank had been received, presented, and honored, and the sendee so

not i f i ed? The contract between the two banks did not so s p e c i f y . I t i s

d i f f i c u l t to see how such a term might be wri t ten into the contract by

impl icat ion. The draft was against the general a s s e t s of the sendee. I t

was against funds or c r e d i t s cons t i tu t ing part of the general a s s e t s of the

sendee by the s p e c i f i c d irect ions of the forwarding bank that transmission

be by draft , i f the sendee so e l e c t . The sendee had a fund in hand in the

form of cred i t s withdrawn from the accounts of depositors whose checks Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

- l & - X - 4 9 8 3

const i tuted the items for c o l l e c t i o n . This fund was i n the exact amount of

the draft transmitted, the genes i s of the draft against the sendee's general

a s s e t s . The conclusion i s unescapable that the contract between the two

hanks contemplated that the draft against the general a s s e t s of the sendee bank

was intended to he o f f - s e t or balanced by a transfer to such general a s s e t s of

the various c r e d i t s r e s u l t i n g from c o l l e c t i o n . Any other would he a forced

one, without foundation in the contract of c o l l e c t i o n between the two banks,

and v i o l a t i v e of bookkeeping p r a c t i c e .

I t i s submitted that i f the contract of c o l l e c t i o n contemplated that the

proceeds of c o l l e c t i o n should be p laced with the general a s s e t s of the sendee

bank and with such a s s e t s commingled, t h i s f a c t , together with the f a c t that

the sendee bank should become, at l e a s t "pro tem, a debtor of the forwarding

bank, demonstrates beyond question that the i n i t i a l r e l a t i o n of Principal

and Agent was terminated and the r e l a t i o n of Debtor and Creditor came in to

being.

As has been out l ined in the e a r l i e r part of t h i s a r t i c l e , i f such re-

l a t i o n came into being, the mere f a i l u r e of the debtor sendee bank to pay

i t s debt to the forwarding credi tor bank did not and could not operate to

revive the trust r e l a t i o n .

As an i l l u s t r a t i o n of the d i f f i c u l t y the court met in r e c o n c i l i n g i t s

decis ion with the f a c t s and contract of the case, i t i s only necessary further

to not ice the court ' s holding with reference to the sendee bank's act in

debiting i t s account with the th ird bank on which i t drew the draf t . As

soon as the sendee drew against such funds, i t debited on i t s own books,

i t s account with the drawee in the amount of the dra f t .

The court in i t s opinion h e l d that t h i s act demonstrated that the

sendee bank intended to s e t apart such a balance as would be required to

meet the draf t , and s ince equity regards that done which ought to have been Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

- 13 -' v m .

X-4983

do tie, the entry of t h i s debit on the books of the sendee "bank amounted to

an equitable assignment and created a trust fund.

The f a l l a c y "becomes apparent i f the reasoning i s applied to the recipro- '

cal accounts method of c o l l e c t i o n . I t s appl icat ion to such method makes the

sendee a f t e r c o l l e c t i o n a f iduc iary in the reciprocal accounts method of co l -

l e c t i o n . In that method to sendee a f t e r c o l l e c t i o n deposits the proceeds

with i t s general a s s e t s and credi t s the forwarding'"bank's account, necessar i ly

debit ing i t s general a s s e t s to balance. This debiting of i t s general a s s e t s

and c r e d i t i n g the forwarding bank's account are only the n e c e s s i t i e s of book-

keeping, as was the debit i n the instant case, and i n cases a r i s i n g out of

the reciprocal accounts method of c o l l e c t i o n there i s probably no case which

construes the act of such debit ing as the creat ion of a construct ive t rus t .

I t i s submitted that the Peters case i s contrary to the reason and

pr inc ip le of our law.

Richmond, Va. HARDIN HAERIS. August, 12, 1927.

Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis