know of the defect, has in some cases been stretched to read merely "ought to have known," in order to hold the maker liable.23

The tendency to broaden the two exceptions to the rule would seem to lead ultimately to a denial of the rule itself and to a basing of the maker's liability to third persons on general principles of tort law. Cardozo, J., in the New York Court of Appeals 24 approaches this very nearly 25 when he says: "The principle that the danger must be imminent does not change, but the things subject to the principle do change. They are whatever the needs of life in a developing civilization require them to be." The case of Henry v. Crook,20 which seems to deny the general rule, may be distinguished, in that the plaintiff was the immediate vendee.

In the principal case, Rosenbroch v. General Electric Co., the defendant would seem to be liable under the second exception to the general rule: liability to third persons if the vendor knew of the defect and failed to notify the vendee. The defendant knew the blocks were in the transformer-put them there purposely-and knew of the danger due to the probability that the Power Company would not remove them, for it was its custom to send notices warning vendees to remove the blocks before using the transformers. Yet it negligently failed to send these notices to the Power Company. If this case were decided on this ground, it is undoubtedly in line with the decisions of most jurisdictions.27

However, the court supports its decision by cases 28 falling under the first exception-cases which extend the term "imminently dangerous," and where the maker did not know of the concealed defects. On this ground, that the transformers were "imminently dangerous" for use as intended due to defects caused by the negligence of the maker, the case falls in line with those cases, though the facts are somewhat novel.

Hitherto in those cases the danger has been due to a defect in the article itself. Here it was a perfect article, yet the manner of packing rendered it defective for use as sent. The result is the same, whether defective due to packing or due to construction. The transformers were defective for use as intended and the defendant could foresee that, in the absence of warning, they would probably be

28 Tomlinson v. Armour & Co., 75 N. J. L. 748, 70 Atl. 314 (1907); Olds Motor Co. v. Shaffer, 145 Ky. 616, 140 S. W. 1047 (1911); Davidson v. Montgomery, Ward & Co., 171 Ill. App. 355 (1912).

24 In MacPherson v. Buick Motor Co., supra in note 16.

Though it is claimed (20 HARV. L. REV. 866-868) that Cardozo, J.,

cast aside the exception entirely in this case.

26 195 N. Y. S. 642 (1922).

23

See supra in note 9.

'Some of which are: Devlin v. Smith, supra in note 14; Torgeson v. Schultz, and Statler v. Ray Mfg. Co., supra in note 15; MacPherson v. Buick Motor Co., supra in note 16.

used as sent, would blow up, and injure persons in their vicinity, and he could foresee that there would probably be employees of the Power Company in their vicinity when they were used.

Therefore, in this case the defendant was correctly held liable on the principles of the broad New York view, though the decision is an extension of that view to cover a slightly new situation.

G. S. S.

THE LIABILITY OF A SUB-AGENT BANK FOR THE PROCEEDS OF A COLLECTED DRAFT.-The recent case of Spokane & Eastern Trust Co. v. United States Steel Products Company presents a number of interesting aspects, because of the problems of law involved and the unusual complexity of its facts. In order to present the issue properly, and to make it in some degree understandable, it is necessary to reduce the statement of the case to its simplest terms, and to eliminate from consideration all unnecessary parties to the transactions which took place. When this is done, it appears that the dispute arose in the following manner:

The X Bank sent the check of the plaintiff, its depositor, to the Z Bank, the drawee. The latter sent it through the clearing house, and obtained two drafts on metropolitan banks, which were forwarded to the Y Bank, the defendant. At the same time the drawee bank drew its draft on the defendant in favor of the X Bank for the amount of the original check. Before this latter draft was presented to the defendant the drawee bank failed and the defendant refused payment, since it had already applied the proceeds of the two drafts to the pre-existing indebtedness of the drawee bank to it. The plaintiff then demanded that the defendant pay over to it the proceeds of the draft and the defendant again refused. The plaintiff then brought suit against the defendant and recovered. The court held that the proceeds of a check in the hands of the col

"The complete statement, as contained in the report, is as follows: The A Company drew a check on the B Bank in favor of the C Company, the plaintiff. The latter deposited it in the D Bank for collection. The D Bank forwarded the check to the B Bank, through whom it made collections. The B Bank was not a member of the local clearing house, but cleared through the E Bank. The E Bank received the check, cleared it and turned over to the B Bank in payment two drafts, one drawn on the F Bank, and one on the G Bank. Instead of forwarding any of the proceeds of the check to the D Bank, the B Bank transmitted the drafts to the H Bank, the defendIt then drew a draft on the H Bank in favor of the D Bank. The H Bank cashed the drafts it received, credited the proceeds to the B Bank and then charged back to the B Bank certain re-discounts bearing the B Bank's endorsement. In this way it applied all the proceeds of the plaintiff's check. Payment of the draft in favor of the D Bank was refused, since the B Bank was insolvent. The C Company then brought suit against the H Bank.

ant.

lecting bank constituted a trust fund.

In addition the officers

of the drawee bank knew of its insolvency when it received the check, and therefore had no authority to make a collection.

It is difficult to understand the transaction. Assuming that the reporter has correctly stated the facts, the first question which at once presents itself is, why should a bank, which receives a check drawn upon itself, send it through the clearing house? In ordinary practice it would merely debit the account of the maker of the check and then transfer the amount for which the check was drawn to the transmitting bank, either by a credit on its books, or by a draft. To send the check drawn upon itself through the clearing house would be of no profit to it and would only result in making its bookkeeping more complicated.

But let us assume that the drawee bank actually did send the check to the clearing house. Immediately the question arises as to how it could receive in payment drafts on another bank. The clearing house, it must be remembered, is an institution for the settlement of differences between banks without the actual transfer of cash. At the beginning of a day each bank in a given locality will have in its possession checks drawn on every other bank. At the same time, every other bank will hold checks drawn upon it. To avoid the endless labor of presenting every item for payment directly to the bank on which it is drawn, all checks are sent to a single point and "cleared." The clearing house, an association of which each bank is a member, credits a bank for each check it presents drawn on another bank; it debits every member for each check which other banks present drawn upon it. At the end of the day the bank has either a debit or a credit balance with the clearing house.

With this explanation in mind, let us consider again the statement of facts in the report. The drawee bank sends the check in question to the clearing house and the clearing house credits it with the amount of the check. But since the check is drawn on the bank, the clearing house must immediately debit it with the same amount. How is it possible under these circumstances for the drawee bank to receive drafts on metropolitan centers for the amount of the check? 3

There is another objection which must be raised. In the United States it is not considered proper to send a check to the drawee bank for collection. It is usually forwarded to another bank in the same locality, to be presented by it to the drawee. The reason for this is clear; the drawee bank is an interested party in the transaction, hence it should not at the same time be the agent of the cred

On the general subject of clearing see: Cannon, Clearing Houses; Thralls, The Clearing House; Phillips, Readings in Money and Banking, Chapter 17; Agger, Organized Banking, Chapter 6.

7 C. J. 608; 1 Morse, Banks & Banking (5th ed. 1917), 472.

itor or cestui que trust. Some disinterested third party should be employed. It is usually held that when the transmitting bank forwards a check to the drawee for collection it is guilty of negligence and is liable to the depositor if the drawee surrenders the draft to the drawer as paid and remits worthless paper which, because of its subsequent failure, is never honored."

It is difficult to understand the case on the above basis. It seems probable that there is an error in the reported statement of the facts. A slight change would render the whole situation perfectly clear, and would make the reasoning of the court intelligible. The report says that the check under discussion was drawn on the Z Bank. Later it states that the X Bank sent it for collection to the Z Bank, its correspondent. This, as we have indicated, causes all the complication. But suppose that the first statement were incorrect, and that in fact the check was drawn on the A Bank. Such an assumption would explain everything. The act of the X Bank in sending the check to its correspondent, the Z Bank, for collection would be perfectly proper. The process of clearing the check would be in accordance with banking practice. The presence of the drafts on metropolitan banks would be explained. The question would resolve itself into an interesting, but not unusual problem in the law of trusts. Furthermore, it must be pointed out that the opinion written by the judge of the Federal Court supports this reconstructed statement of the facts. In it he treats the Z Bank as if it were the collecting bank which was to secure the proceeds of the check from some other institution, and not as if it were the drawee, who was merely to debit the drawer and to remit funds which it already had.

Looked at from this point of view, we meet again the question which has been raised many times. To whom do the proceeds of an instrument deposited for collection belong? It is an elementary proposition that when one deposits money in a bank, the agreement is not that the bank shall keep that specific money on hand, to be paid back whenever the depositor asks for it. The bank merely promises to owe the depositor that amount, and to pay him on demand out of whatever funds it may have on hand. In other words, the bank does not hold the cash deposited in trust; it acquires complete title to it, and may use it in any way it sees fit. It is the debtor of the depositor, who has no more than a chose in action against the bank.

When one considers the deposits of commercial paper, the situation is a little more difficult. It is possible for the bank to become

'Merchants' National Bank v. Goodman, 109 Pa. 422, 2 Atl. 687 (1885); Bank of Rocky Mount v. Floyd, 142 N. C. 187, 55 S. E. 95 (1906); Smith v. National Bank of D. O. Mills & Co., 191 Fed. 226 (C. C. 1911).

6

Ames, Law of Trusts, 29, note; Foley v. Hill, 2 H. L. C. 28 (1848); Bank of the Republic v. Millard, 10 Wall. 152 (U. S. 1869); Carr v. National Security Bank, 107 Mass. 45 (1871), (1869).

the debtor of the depositor, just as it did when he deposited money. But it does not necessarily become a debtor. Often the bank is held to be an agent, i. e., a trustee, who is given the paper for the specific purpose of collection. Until this purpose is carried out, the bank does not owe the depositor anything. It has the authority to collect the check or the note, but the depositor has the equitable title, and may recover the instrument from the bank for any sufficient reason. Sometimes the depositor will indorse his check "for collection"; 10 sometimes the bank will include in the pass-book a provision that it shall act only as the agent of the depositor." In such cases there can be no doubt as to the relationship which exists.

9

But the moment the collecting bank has carried out the mission which was entrusted to it, and has collected the instrument, the better view, denied by only a few cases,12 is that the relationship between the parties changes. Where, before, the collecting bank was a trustee of the check, it is now merely indebted to the depositor, just as it would have been, had it received a deposit of cash. This is because the bank, having received the proceeds, has the right to mix them with its own funds. The trust has been superseded by a debt.13

When a check is drawn on a distant bank and is forwarded to a correspondent for collection, with specific instructions to collect and to remit the proceeds, there is a stronger basis for argument that a trust in such proceeds exists until the funds are in the hands of the depositor's bank. The majority of cases say that it does

14

Capital & Counties Bank v. Gordon, (1903) A. C. 240 (Eng.); Taft v. Quinsigamond National Bank, 172 Mass. 363, 52 N. E. 387 (1899); Anderson, et al., v. Keystone Chemical Supply Co., 293 Ill. 468, 127 N. E. 668 (1920).

Richardson v. Continental National Bank, 94 Fed. 450, 36 C. C. A. 315 (1899); Morris Miller Co. v. Von Pressentin, 63 Wash. 74, 114 Pac. 912 (1911).

9

As, for example, the insolvency of the collecting bank before the collection is made. See infra, note 18.

10

First National Bank v. Gregg & Co., 79 Pa. 384 (1875); Manufacturers' National Bank v. Continental Bank, 148 Mass. 553, 20 N. E. 193 (1889); Old National Bank of Evansville v. German American Nat. Bank, 155 U. S. 556 (1895).

South Park Foundry & Machine Co. v. Chicago, Great Western Ry., 75 Minn. 186, 77 N. W. 796 (1899).

12 Nurse v. Satterlee, 81 Iowa 491, 46 N. W. 1102 (1890); State v. Bank of Commerce, 61 Neb. 181, 85 N. W. 43 (1901); Kansas State Bank v. First State Bank, 62 Kan. 788, 64 Pac. 634 (1901).

13 Marine Bank v. Fulton Bank, 2 Wall. 252 (U. S. 1864); National Butchers' & Drovers' Bank v. Hubbell, 117 N. Y. 384, 22 N. E. 1031 (1889); United States Nat. Bank of Omaha v. Glanton, 146 Ga. 786, 92 S. E. 625 (1917).

Holder v. West German Bank, 136 Fed. 90, 68 C. C. A. 554 (1905); Brown v. Sheldon State Bank, 139 Iowa 83, 117 N. W. 289 (1908); State National Bank v. First National Bank of Atchison, 124 Ark. 531, 187 S. W. 673 (1916).