Responsibility for Selection of Agent A confusion of court opinions exists as to the duty and lia bility of the several banks preceding, in the chain of transmission, the last one, which has to effect the actual collection. If a de positor puts an item in bank A for collection and bank A engages bank B as its collecting agent, and bank B in turn engages bank C, which does the final collecting, the question arises as to the responsibility of banks B and C to the depositor—are they his agents, and responsible to him?—and as to the relations of banks B and C to bank A.
In all cases a bank is held liable for negligence in the selection of its correspondent. A bank is commonly held to be negligent if it makes the bank upon which a check or draft is drawn, or a bank where a bill or note is payable, an agent in the collection of that item; in other words, it is negligence to send a bill directly to the drawee bank or the bank where it is payable. This is the commonly accepted rule in almost every state, but it is not uni versal. It rests upon the reason that it is imprudent and indis creet to employ a debtor bank to collect against itself; that the drawee bank usually remits its own paper in payment and may fail before such paper is presented for payment, whereas if the item had been originally sent to a correspondent it might have been presented and payment in money received before the drawee bank failed. Some states vary this rule by not holding liable a bank which sends items directly to the drawee bank, if the drawee bank is the only reliable bank in the town; but other states hold the sending bank liable even though the drawee bank is the only one in the town; in such cases the sending bank may elect to assume the business risk or may collect through an express office, notary, or other agent.
An express contract between the first bank and the depositor determines the liabilities of the first bank and its subagents. In a state where the matter has not been judicially determined, usage may determine the question of liabilities. The New York rule is that the first bank is responsible for the negligence of its correspondent and its agents, and that these agents are agents of the first bank. The New York rule is also held in numerous states and by the United States Supreme Court, and is based on the principle of agency that the first agent is liable for the acts of all the subagents employed by him. The Massachusetts rule
is that when the first bank transmits the item with due care to a correspondent selected with clue care, it has done its duty and is not responsible for the negligence of the correspondent or its agents. This rule prevails in a still larger list of states, and rests on the premise that the general rule that the first agent is liable for negligence of the subagents employed by him finds exception whenever there is authority expressly given or fairly implied from the usage of trade or the exigencies of the case to employ such subagent, and that the substitute appointed by any agent, who has this power of substitution, becomes the agent of the original principal.
Restrictive Indorsement of Items The question of the nature of the agency relations of the de positor and the bank is inextricably bound up with the question of title to the deposit. When items are deposited for collection, credited to the depositor on general account, and drawn against, the bank is holder for value and the items are part of its assets. The bank acquires title to the items on an implied agreement to pay an equivalent consideration on demand by the depositor; the bank is assumed to treat the items as a deposit of cash and to assume toward the depositor the relation of debtor, and not that of bailee, and the customer assents to that arrangement by draw ing checks on the credit. If, however, the item is indorsed restrictively "for collection," such indorsement does not give the bank title to the paper and is notice to all parties that the col lecting bank does not own the proceeds and cannot keep the pro ceeds to pay a debt of the bank that forwarded the paper; nor does the bank owe that amount until the item has actually been collected. Items which bear this restrictive indorsement are not clearable through the New York and most other clearing houses according to a rule adopted in 1898, when a court decision was handed down that a bank receiving such paper was a mere agent and not responsible for genuineness after payment of the proceeds to its principal. The banks at once frowned upon restrictive indorsements since they wished to protect themselves by the warranties of a general indorsement. The clearing houses ex clude all paper restrictively indorsed unless the sending bank guarantees all previous indorsements.