PEOPLES BANK v. McDOWELL NAT. BANK

Banks and banking — Set-off — Deposits — Insolvency — Principal and agent — Collections — Checks.

1. In an action by the secretary of banking, in possession of an insolvent bank, against another bank to recover a deposit, the defendant may set off against the deposit the amount of checks delivered by a federal reserve bank, acting as agent for defendant in collecting, the checks, where it appears that defendant, after receiving them, endorsed the checks over to the federal reserve bank, for collection and that the insolvent bank, after duly receiving the checks from the federal reserve bank, accepted and charged the same against the drawer's accounts, and issued its draft in payment of the checks to the federal reserve bank, and the latter bank, after the draft had been dishonored by the secretary of banking, assigned its interest in the same to the defendant. [249-250]

2. In such case the rights arising out of the checks themselves were extinguished, when the drawee bank charged its depositors' accounts with the respective amounts of their checks, and it thereby became indebted to defendant for their amount. [251]

3. When the drawee bank charged its depositors' accounts with the amounts of their checks, the effect was to pay them with money of the defendant, and it thereby became indebted to defendant in the amount of the checks so paid, which automatically reduced the indebtedness to the drawee's bank to that extent. [251]

4. Set-off is founded on equitable principles for the purpose of preventing circuity of action. [252]

5. Where a check is sent for collection directly to the bank on which it is drawn, and when such bank performs the dual function of collection and crediting, the transaction is closed, and, in the absence of fraud or mutual mistake, is equivalent to payment in due course. [251-252]

Banks and banking — Insolvency — Federal reserve banks — Collection — Principal and agent — Checks — Regulation J., series 1924, Act of May 21, 1913, P. L. 294.

6. A federal reserve bank, under Regulation J., series 1924, in handling checks for collection, acts as the agent of the bank forwarding the checks, and the latter bank is entitled to assert its rights as principal, though not named, so long as no subsequent superior rights have intervened. [252]

7. Whenever a principal can show that the money has been placed in the hands of another by his agent, it is no objection to his claim that the other has promised to pay to the agent. [253]

8. In the distribution of the assets of an insolvent bank the rights of a forwarding bank as principal are not affected by the Act of May 21, 1913, P. L. 294, which provides that a person receiving the check of a bank in payment of the check of another person shall be treated as a depositor in the event of the insolvency of such bank, inasmuch as the deposit would belong to the principal and not to its agent as payee of the check. [254]

Argued March 14, 1932.